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How IRA Distributions Impact the 3.8% Healthcare Surtax

Wednesday, September 11, 2013  No comments

IRA distributions impact 3.8% healthcare surtaxHow can you and your financial advisor work together to lower your tax liability? One of the questions we often ask financial professionals is, "what have you done to lower your clients' exposure to the new 3.8% healthcare surtax on net investment income?"

If you take an IRA distribution, the 3.8% surtax is NOT assessed on that distribution. Also, the surtax can only affect single filers above $200,000 MAGI (modified adjusted gross income) and married joint filers above $250,000 - but even then, it is only assessed on net investment income.

However, an IRA distribution can push tax filers ABOVE the MAGI thresholds, and in certain cases, trigger the surtax. How? View our IRAtv video below or click here to view the video.


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Q:
You recently said that a 401(k) distribution would add to your MAGI (modified adjusted gross income) for the purpose of determining if you are subject to the 3.8% healthcare surtax. What about Roth IRA distributions? Would they also count towards your total MAGI income for surtax purposes?

Thanks

A:
IRA distributions are exempt from the 3.8% surtax, but taxable distributions from IRAs can push income over the threshold amount, causing other investment income to be subject to the surtax. Because Roth IRA distributions are generally tax-free, they don’t count towards your total MAGI.

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