Q. A recent article ("Roth IRA Conversions: A touch of class") seems to indicate that Roth IRA conversions are subject to the 3.8% Medicare surtax, but I thought that all retirement distributions are exempt. Were you wrong? C.J., CPA, LaGrange, Ga.
A. No. It’s true that distributions from qualified retirement plans and IRAs (including deemed IRA distributions from Roth conversion transactions) are exempt from the definition of “net investment income” (NII). However, a Roth conversion increases your modified adjusted gross income (MAGI) for the year, which can create or increase exposure to the 3.8% Medicare surtax. Specifically, if the Roth conversion causes you to have MAGI in excess of the applicable threshold, the conversion can cause some or all of your net investment income to be hit by the surtax. Thus, a Roth conversion in 2013 may indirectly trigger the 3.8% Medicare surtax or indirectly increase the surtax.
Tip: The IRS has released new proposed regulations concerning the 3.8% Medicare surtax.