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How Roth Conversions Affect NIIT
NIIT is the Net Investment Income Tax. A Roth conversion is not itself net investment income, but it can raise MAGI enough to expose investment income to the additional 3.8% tax.
The Rule
NIIT applies to the lesser amount
The 3.8% NIIT generally applies to the lesser of net investment income or the amount by which modified adjusted gross income exceeds the applicable threshold.
| Filing status | MAGI threshold | NIIT base |
|---|---|---|
| Single / Head of household | $200,000 | Lesser of net investment income or MAGI above threshold |
| Married filing jointly | $250,000 | Lesser of net investment income or MAGI above threshold |
| Married filing separately | $125,000 | Lesser of net investment income or MAGI above threshold |
Why Roth Conversions Matter
The conversion can unlock tax on existing investment income
Because a Roth conversion increases MAGI, it can cause dividends, interest, capital gains, rental income, or other investment income to become subject to NIIT. The conversion itself is ordinary income, but it may be the income that pushes the household above the NIIT threshold.
The planning opportunity: test conversion size against taxable-account income and decide whether to harvest gains, defer gains, use charitable strategies, or convert in years when investment income is lower.
Example
$90,000 conversion near the NIIT threshold
Assume a married couple has $235,000 MAGI and $70,000 of net investment income. Before the conversion, only $0 to $55,000 may be near the threshold depending on the exact MAGI calculation. Add a $90,000 conversion, and MAGI rises to $325,000. NIIT applies to the lesser of $70,000 of net investment income or $75,000 over the $250,000 threshold, so $70,000 could be exposed to the 3.8% tax.
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