Does a Roth Conversion Trigger the 3.8% NIIT? (w/Examples) + FAQs

This article reflects federal rules as of June 2026 and covers tax years 2025 and 2026. State rules are addressed in their own section. Tax law changes — confirm current figures before you file.

Quick Answer

No. A Roth conversion is never directly hit by the 3.8% Net Investment Income Tax (NIIT). The converted amount is not “investment income.” But for tax years 2025 and 2026, the conversion raises your modified adjusted gross income (MAGI), and that higher MAGI can drag your other investment income into the 3.8% tax.

So the honest answer has two layers. The conversion dollars themselves escape the NIIT because Section 1411(c)(5) of the tax code excludes retirement-plan distributions from “net investment income.” Yet the same conversion inflates your MAGI, and the NIIT applies the 3.8% rate to the smaller of your net investment income or the amount your MAGI exceeds the threshold.

This matters because the timing and size of a conversion can decide whether your dividends, interest, and capital gains stay tax-free from the surtax or suddenly owe it. The IRS reports that the NIIT raised about $60 billion in a recent year, and high earners doing conversions are squarely in its path.

Here is what you will learn:

🧮 Why the conversion amount is excluded from NIIT but still pushes your MAGI up.
📊 The exact 2025 and 2026 MAGI thresholds and how the “lesser of” rule works.
💵 Four fully worked dollar examples, including one that triggers both NIIT and IRMAA.
🧾 How Form 8960 calculates the tax, line by line.
🚫 Seven costly mistakes that turn a smart conversion into a surprise tax bill.

What the 3.8% NIIT Actually Is

The Net Investment Income Tax is a 3.8% surtax on certain investment income for higher earners. Congress created it in 2013 to help fund health care, and you report it on Form 8960. It sits on top of your regular income tax and your capital gains tax.

The tax is not new and it was not changed by the 2025 tax law (OBBBA). The 3.8% rate and the MAGI thresholds have stayed flat since 2013. Those thresholds are not indexed for inflation, so more people drift into the tax every year as incomes rise.

You owe the NIIT only if two things are both true. First, you have net investment income. Second, your MAGI is above the threshold for your filing status. If either one is zero or below the line, you owe no NIIT — and that is the key that makes Roth conversion planning so powerful.

What counts as net investment income

Per IRS Topic 559, net investment income generally includes interest, dividends, capital gains, rental and royalty income, annuity income, and passive business income. These are the dollars the 3.8% rate can touch.

What it does not include is just as important. Wages, self-employment income, Social Security benefits, and — critically — distributions from IRAs, 401(k)s, and Roth conversions are not net investment income. The exclusion for retirement accounts lives in Section 1411(c)(5), which names accounts under sections 401(a), 403(a), 403(b), 408, 408A, and 457(b).

The consequence is clear: a $100,000 Roth conversion adds zero dollars to the “net investment income” side of the math. If that were the whole story, conversions would never matter for the NIIT. But it is not the whole story.

Why MAGI is the trap

MAGI for the NIIT is your adjusted gross income plus any foreign earned income exclusion you claimed. For most people with no foreign income, MAGI equals AGI. A Roth conversion does land in AGI, so it does land in MAGI.

That is the catch. The conversion is excluded from the income side of the NIIT formula but included on the MAGI side. The result is that a conversion can lift your MAGI over the threshold and expose investment income that was previously safe.

The misconception here is common: people assume “retirement distributions don’t count for NIIT, so my conversion is safe.” That is half true and half dangerous. The conversion is safe from being taxed itself, but it is not safe from causing tax on your other income.

The Thresholds and the “Lesser Of” Rule

The NIIT applies the 3.8% rate to the lesser of (a) your net investment income or (b) the amount your MAGI exceeds the threshold. You always pay on the smaller of those two numbers. The thresholds below are unchanged from 2025 to 2026.

Filing status (tax years 2025 and 2026)	MAGI threshold
Single or Head of Household	$200,000
Married Filing Jointly	$250,000
Married Filing Separately	$125,000
Qualifying Surviving Spouse	$250,000

These figures come straight from the IRS NIIT page and apply to both filing seasons. Estates and trusts face a far lower threshold — about $15,650 for 2025 — which is why conversions inside an estate context are handled differently.

The “lesser of” rule is the heart of conversion planning. If your investment income is small, you pay 3.8% only on that small amount, even if your MAGI rockets far over the line. If your MAGI is barely over the line, you pay only on that thin slice, even if you have large investment income.

Which Situation Applies to You?

The NIIT effect of a conversion depends entirely on your numbers. Find yourself below.

You have little or no investment income (interest, dividends, capital gains). A conversion cannot trigger NIIT for you, because the tax base is near zero. Read the “Zero NIIT” example.
Your MAGI is already well below the threshold even after the conversion. No NIIT applies. You are safe regardless of investment income.
Your MAGI sits near the threshold and you hold dividends or capital gains. This is the danger zone. A conversion can pull investment income into the tax. Read the “Couple” and “Ladder” examples.
You are 63 or older and on (or near) Medicare. You face a second hidden cost — IRMAA — on top of NIIT. Read the “IRMAA” example.
You are still working with high wages plus a taxable brokerage account. Wages alone do not owe NIIT, but they raise MAGI, so a conversion stacks on top and can fully expose your investment income.

Worked Examples (the Math, Step by Step)

These four named scenarios use 2026 figures. Copy the math for your own return.

Example 1 — Maria, single, owes zero NIIT

Maria is 58, single, and converts $120,000 from a traditional IRA. Her other income is a $40,000 pension. She has only $500 of bank interest and no dividends or capital gains.

Net investment income: $500.
MAGI: $40,000 + $120,000 + $500 = $160,500.
Single threshold: $200,000.
MAGI is below the threshold, so the excess is $0.

Maria owes 3.8% on the lesser of $500 or $0, which is $0. Her large conversion triggered no NIIT at all, because her MAGI never crossed $200,000 and her investment income is tiny.

Example 2 — Tom and Lisa, married, conversion triggers NIIT

Tom and Lisa file jointly. Their baseline income is $210,000, and they hold $30,000 of qualified dividends and long-term capital gains. They convert $80,000.

Net investment income: $30,000.
MAGI: $210,000 + $30,000 + $80,000 = $320,000.
MFJ threshold: $250,000.
MAGI excess: $320,000 − $250,000 = $70,000.

NIIT applies to the lesser of $30,000 (investment income) or $70,000 (excess), which is $30,000. Their NIIT is 3.8% × $30,000 = $1,140. Without the conversion, their MAGI would be $240,000 — below the line — and they would owe $0. The $80,000 conversion created a $1,140 surtax on income they already had.

Example 3 — David, partial-conversion ladder

David, 60, files jointly with his wife. Their base income is $220,000 with $20,000 of dividends. He wants to convert $100,000 but dreads the NIIT.

If David converts the full $100,000, his MAGI is $340,000, the excess over $250,000 is $90,000, and he pays 3.8% on the lesser of $20,000 or $90,000 — that is $760 in NIIT. Instead, David converts only $10,000 this year. His MAGI becomes $250,000, the excess is $0, and his NIIT is $0. He spreads the rest across future years to stay under the line — a “conversion ladder.”

Example 4 — Susan, triggers both NIIT and IRMAA

Susan is 65, single, and on Medicare. Her base income is $190,000 with $25,000 of dividends. She converts $60,000.

MAGI: $190,000 + $25,000 + $60,000 = $275,000.
NIIT excess: $275,000 − $200,000 = $75,000; tax on lesser of $25,000 or $75,000 = 3.8% × $25,000 = $950.
IRMAA: Per the 2026 IRMAA brackets, MAGI of $275,000 (single) lands in the $205,000–$500,000 band, raising her Part B premium to $649.20/month versus the standard $202.90.

Susan’s conversion costs her $950 in NIIT plus roughly $5,356 in extra annual Medicare premiums. IRMAA uses a two-year lookback, so the 2026 conversion hits her 2028 premiums.

Scenario Tables

Conversion size vs. NIIT result (single filer, $15,000 dividends)

Conversion and resulting MAGI	NIIT outcome
Convert $30,000 → MAGI $185,000	Below $200,000 threshold; NIIT is $0.
Convert $50,000 → MAGI $205,000	Excess is $5,000; pay 3.8% on lesser of $15,000 or $5,000 = $190.
Convert $90,000 → MAGI $245,000	Excess is $45,000; pay 3.8% on full $15,000 = $570.

How different income types behave (tax year 2026)

Income type on the conversion return	NIIT treatment
The Roth conversion itself	Excluded from net investment income; raises MAGI only.
Qualified dividends and capital gains	Counted as net investment income; can be taxed 3.8%.
Wages and Social Security	Not investment income, but wages raise MAGI.

Timing choices and their effect

Conversion strategy	Consequence for the NIIT
One large conversion in a high-income year	Most likely to push MAGI over the line and expose all investment income.
Small annual conversions (a ladder)	Keeps MAGI under the threshold; often avoids NIIT entirely.
Convert in a low-income gap year (early retirement)	Lower baseline MAGI leaves room before the threshold.

How Form 8960 Calculates the Tax

You report the NIIT on Form 8960, which attaches to your Form 1040 and flows to Schedule 2, line 12. The IRS Form 8960 instructions walk through three parts.

Part I (lines 1–8) totals your investment income — interest, dividends, annuities, rents, and net gains. Your Roth conversion does not appear here, because it is excluded. This is the line where people wrongly try to add the conversion; do not.

Part II (lines 9–11) subtracts allowable investment expenses, such as investment interest and the state income tax allocable to investment income. Part III then does the comparison: line 13 is your MAGI (which does include the conversion), line 14 is your threshold, line 16 is the lesser of net investment income or the MAGI excess, and line 17 multiplies that by 3.8%.

The consequence of misreporting is real. If you mistakenly include the conversion in Part I, you overpay the surtax; if you understate MAGI on line 13, you underpay and risk penalties. The deadline is your regular filing date — April 15, 2027, for the 2026 return — and if you skip the form when required, the IRS can assess the tax plus interest.

Federal vs. State: Does Your State Have Its Own NIIT?

The 3.8% NIIT is a federal tax only. No state imposes the federal NIIT, and most states have no separate investment-income surtax of their own. The practical effect: in most states, your only NIIT exposure from a conversion is federal.

Issue	Federal	State
3.8% NIIT on investment income	Applies above MAGI thresholds	No state copies the federal NIIT
Tax on the conversion itself	Taxed as ordinary income	Most states tax the conversion as income

A few states add their own high-income surtaxes that can resemble the NIIT in spirit. For tax year 2025, Massachusetts imposes a 4% surtax on income over about $1 million, and a Roth conversion can push you into it. No-income-tax states such as Florida, Texas, and Washington tax neither the conversion nor investment income. Always confirm your own state’s rule, because conformity genuinely varies.

Mistakes to Avoid

Assuming the conversion is “safe” from NIIT. It is safe from being taxed itself, but it raises MAGI and can tax your other income — a surprise $1,000+ surtax.
Converting one giant lump sum. A single large conversion is the fastest way to vault over the threshold; a ladder usually avoids the tax.
Forgetting capital gains realized the same year. Selling stock and converting in the same year stacks two MAGI sources, doubling your NIIT exposure.
Ignoring IRMAA. A conversion that triggers NIIT often triggers Medicare IRMAA too, costing thousands more two years later.
Including the conversion on Form 8960 Part I. This overstates investment income and overpays the surtax.
Converting late in December without a tax projection. You lose the chance to fine-tune the amount before year-end.
Overlooking the Married Filing Separately trap. The $125,000 threshold is far lower, so a modest conversion can trigger NIIT for separate filers.

Do’s and Don’ts

Do run a tax projection before converting, so you know your MAGI before December 31.
Do convert in low-income years, such as the gap between retirement and Social Security, where the threshold gives you room.
Do use partial annual conversions to keep MAGI under the line.
Do coordinate conversions with capital-gain harvesting, so both do not spike in the same year.
Do track the two-year IRMAA lookback if you are near age 63 or older.
Don’t assume your state mirrors the federal answer; check your state surtax rules.
Don’t convert blindly up to a bracket without checking the NIIT threshold separately.
Don’t forget that wages and Social Security raise MAGI even though they are not investment income.
Don’t include the conversion as investment income on Form 8960.
Don’t ignore the MFJ-to-single shift after a spouse’s death, which slashes the threshold.

Pros and Cons of Converting Despite the NIIT

Pro: Future Roth growth and withdrawals are tax-free, so a one-time NIIT cost can be small next to decades of tax-free gains.
Pro: Converting now shrinks future required minimum distributions, which lowers future MAGI and future NIIT.
Pro: Roth accounts are not subject to RMDs for the original owner, giving lasting MAGI control.
Pro: A Roth left to heirs passes income-tax-free, easing their NIIT exposure too.
Pro: Locking in today’s tax rates can beat converting later if rates rise after 2025-law provisions sunset.
Con: The conversion can trigger NIIT on your other investment income in the conversion year.
Con: It can also trigger IRMAA, raising Medicare premiums two years later.
Con: You pay the conversion tax now, out of pocket, reducing money that could keep compounding.
Con: A large conversion can push you into a higher ordinary bracket and the higher capital-gains rate.
Con: The benefit depends on assumptions about future tax rates that may not hold.

What to Do Next

Estimate your MAGI for the year before converting, including wages, pensions, dividends, and gains.
Compare that MAGI to your filing-status threshold ($200,000 single, $250,000 MFJ, $125,000 MFS for 2025 and 2026).
Size the conversion so your MAGI stays under the line, or accept the 3.8% cost if the long-term Roth benefit is worth it.
Check the IRMAA brackets if you are 63 or older, since the conversion affects premiums two years out.
Gather your 1099-INT, 1099-DIV, and 1099-B forms so your Form 8960 numbers are accurate.
Convert before December 31, because there is no extension or recharacterization for conversions.
Call a CPA or tax advisor if your conversion is large, you are near Medicare, or you have a complex investment portfolio.

This article is educational and is not a substitute for advice from a licensed tax professional for your specific situation. When a conversion is large, spans several years, or interacts with Medicare and estate planning, a CPA or tax attorney can model the trade-offs precisely.

FAQs

Does the Roth conversion amount itself get taxed by the 3.8% NIIT? No. Section 1411(c)(5) excludes retirement-account distributions and conversions from net investment income. The conversion is taxed as ordinary income, not by the NIIT directly.

Can a Roth conversion cause me to owe NIIT? Yes. Indirectly. The conversion raises your MAGI, and a higher MAGI can push your dividends, interest, and capital gains above the threshold, exposing them to the 3.8% tax.

What are the NIIT MAGI thresholds for 2026? $200,000 for single filers, $250,000 for married filing jointly, and $125,000 for married filing separately. These are unchanged from 2025 and are not adjusted for inflation.

Does my IRA or 401(k) withdrawal count as net investment income? No. Distributions from IRAs and qualified plans are excluded from net investment income, though they do raise your MAGI for the NIIT calculation.

Did the 2025 tax law (OBBBA) change the NIIT? No. The 3.8% rate and the MAGI thresholds were not changed. The NIIT has applied the same way since 2013.

How do I avoid NIIT when converting? Keep your MAGI under the threshold. Use smaller annual conversions, convert in low-income years, and avoid stacking large capital gains in the same year.

Is the NIIT the same as IRMAA? No. The NIIT is a 3.8% federal income surtax. IRMAA is a Medicare premium surcharge. A conversion can trigger both, but they are separate.

Which form reports the NIIT? Form 8960. You attach it to Form 1040, and the tax flows to Schedule 2, line 12. Report MAGI on line 13, not the conversion as income.

Do states charge the 3.8% NIIT? No. No state imposes the federal NIIT, and most have no equivalent. A few, like Massachusetts, have separate high-income surtaxes you should check.

Does a Roth conversion affect my Medicare premiums? Yes. A conversion raises MAGI, which can trigger IRMAA surcharges on Part B and Part D about two years later, based on a two-year income lookback.

What is the maximum NIIT I could pay on a conversion year? 3.8% of the lesser of your net investment income or your MAGI excess. You never pay 3.8% on the conversion amount itself.

Can married filing separately filers trigger NIIT more easily? Yes. Their threshold is only $125,000, far below the $250,000 joint figure, so even a modest conversion can expose investment income to the tax.

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