Are IRA Distributions Subject To NIIT? | 3.8% Tax Triggers

No, IRA payouts aren’t net investment income, yet they can lift your income enough that other investment gains face the 3.8% NIIT.

NIIT is often described as a 3.8% tax on investments. The confusing part is how retirement withdrawals fit in. A taxable IRA distribution feels like “income,” so many filers assume it’s taxed again under NIIT.

The clean answer: NIIT targets certain investment income, and it only applies when your modified adjusted gross income (MAGI) is above a filing-status threshold. IRA distributions can raise MAGI and flip the NIIT switch on your other investment income.

IRA Distributions And The NIIT 3.8% Tax: What It Covers

NIIT comes from Internal Revenue Code section 1411. It’s 3.8% of the lesser of (1) your net investment income or (2) the amount your MAGI is over the threshold for your filing status. The calculation is done on Form 8960.

Net investment income is a defined bucket. It generally includes interest, dividends, capital gains, rental and royalty income, and some passive business income. Wages from a job are not in this bucket. Qualified plan and IRA distributions are also outside this bucket.

The threshold test is based on MAGI. The IRS has a plain-English overview on its Net Investment Income Tax page, including how MAGI fits into the formula.

Why IRA Distributions Still Matter

Think of an IRA distribution as the item that can push you over the threshold. Once you’re over, NIIT may apply to investment income you already had—dividends in a brokerage account, a capital gain from selling stock, net rental income, and similar items.

That’s why it helps to track two numbers at the same time: your expected MAGI and your expected net investment income. You can be over the threshold and still owe zero NIIT if you have no net investment income. You can also have net investment income and owe zero NIIT if your MAGI stays under the threshold.

Are IRA Distributions Subject To NIIT? The Straight Rule

An IRA distribution is not counted as net investment income and isn’t listed as an NIIT item on Form 8960. That’s the direct rule.

But IRA distributions are included in AGI, and AGI flows into MAGI for NIIT in most cases. So the distribution can raise the number used to test whether NIIT applies to your investment income. The statute language is in 26 U.S. Code § 1411, and the IRS provides working detail in the Form 8960 instructions.

A Simple Numbers Walkthrough

Say you file single. You have $15,000 of dividends and long-term capital gains in your taxable account. You also take a $60,000 traditional IRA distribution for living costs. If that IRA payout pushes your MAGI above the NIIT threshold for single filers, your net investment income may be hit with 3.8%—up to the amount your MAGI is over the threshold.

Notice what’s taxed: the $15,000 of investment income that falls inside the NIIT definition, not the $60,000 IRA distribution. Still, the IRA distribution is the reason the 3.8% tax shows up on the return.

Traditional IRA Vs Roth IRA

Traditional IRA distributions are usually taxable and raise AGI. Roth IRA qualified distributions are generally not included in income and don’t raise AGI. That difference can decide whether you cross the NIIT line in a given year.

A Roth conversion is separate. A conversion from traditional to Roth is generally included in income, so it can raise MAGI in the year of the conversion. That can trigger NIIT on investment income you already have in that same year.

Inherited IRAs And Required Minimum Distributions

Inherited IRA payouts that are taxable raise AGI, same as other taxable IRA distributions. Required minimum distributions (RMDs) from traditional IRAs also raise AGI. NIIT still targets investment income, yet the retirement payout can be the spark that makes the NIIT math apply.

What Counts As Net Investment Income On Real Returns

Form 8960 starts with investment income items, subtracts allowed deductions tied to that income, then compares the result to the MAGI threshold amount. IRA distributions don’t land in the “investment income” bucket on that form, but they do affect the MAGI comparison.

Also watch income that doesn’t feel like “investing.” Rental income can fall into NIIT when treated as passive activity. A passive partnership allocation can also be in scope. These items can catch people off guard in a year when a large IRA distribution bumps MAGI.

Income Item	Counts As Net Investment Income?	NIIT Notes
Interest from taxable accounts	Yes	Included unless it’s from a tax-exempt source.
Qualified and ordinary dividends	Yes	Brokerage dividends are in scope once MAGI is over the threshold.
Capital gains from selling stocks or funds	Yes	Net gains are counted after capital losses and carryovers.
Net rental income	Often	Often in scope when treated as passive activity.
Royalty income	Yes	Generally included unless tied to a non-passive trade or business.
Passive partnership or S-corp income	Often	Passive business income can be in scope under the rules.
Traditional IRA distributions	No	Not investment income, yet taxable payouts raise AGI and MAGI.
Roth IRA qualified distributions	No	Usually not included in income, so they often don’t raise MAGI.
Wages and salary	No	Not investment income, yet wages can lift MAGI above the threshold.

How IRA Withdrawals Can Trigger NIIT Indirectly

Most NIIT surprises come from stacking events in one tax year. A retirement payout can coincide with a sale of investments, a year of strong dividends, or passive income that’s already in NIIT’s scope.

Stacking With Capital Gains

A large capital gain is in NIIT’s scope. If your MAGI is under the threshold, NIIT may not apply. Add a taxable IRA distribution, and MAGI can cross the line. The same gain can now be subject to the 3.8% tax, at least in part.

Stacking With Rental Income

Rental income can be steady, which makes it easy to forget that it may be treated as investment income for NIIT. If you take a large IRA distribution in the same year, your MAGI can rise enough that rental net income is now part of the NIIT base.

Stacking With A Roth Conversion

A Roth conversion increases taxable income in the conversion year. If you also have dividends, interest, or a planned investment sale, NIIT can show up in the same year. When you model a conversion, include NIIT in the total tax picture, not just regular income tax.

Planning Moves That May Reduce NIIT Exposure

This section lists ways to run a better estimate before you act. Tax rules are personal, so treat these as prompts to run the numbers on your own facts.

Spread Taxable IRA Distributions Across Years

If you have flexibility on withdrawals, spreading taxable IRA distributions across multiple years can keep MAGI closer to the NIIT threshold. That can keep part of your investment income out of the NIIT calculation in some years.

Separate A Big Gain From A Big Withdrawal

If you expect a year with a large IRA payout, check whether you can delay selling appreciated taxable investments until a later year. The goal is to avoid stacking high MAGI with high net investment income in the same year.

Check Deductions Tied To Investment Income

Form 8960 allows certain deductions that are properly allocable to investment income, such as investment interest expense. These deductions can reduce net investment income and lower NIIT in some cases.

Situation	NIIT Risk	What To Check
Large taxable IRA distribution in a year with dividends	Medium	Estimate MAGI, then compare to threshold and net investment income.
Roth conversion plus selling appreciated investments	High	Model NIIT on the gain while MAGI is higher due to the conversion.
RMD year plus rental income	Medium	Check whether rentals are passive and included on Form 8960.
Inherited IRA payout plus capital gain	High	Run timing options to keep gain and payout in separate tax years.
Roth qualified distribution and taxable investment income	Low	Roth payouts often don’t raise MAGI, so the threshold may stay lower.
No taxable investments, only retirement withdrawals	Low	NIIT needs net investment income; retirement payouts alone usually won’t create it.

Common Edge Cases

Tax-Deferred Accounts Don’t Create NIIT While Inside The Account

Dividends and capital gains inside an IRA don’t show up as taxable investment income each year. NIIT looks at taxable investment income on your return, not internal activity in the IRA.

Early Distributions Are A Different Rule

Early IRA distributions can trigger a 10% additional tax in some cases. That additional tax is separate from NIIT. You could owe the early-distribution tax and still owe zero NIIT if you have no net investment income.

Practical Checklist Before You File

• Estimate AGI after IRA distributions, then treat that as MAGI unless you have foreign earned income exclusions.
• Add up taxable interest, dividends, capital gains, net rental income, and passive income that may fall under NIIT.
• Subtract eligible deductions tied to investment income, including investment interest expense where allowed.
• Compare MAGI to the threshold and compute the amount over the line.
• NIIT is 3.8% of the lesser of net investment income or the amount MAGI exceeds the threshold.

Final Take

IRA distributions generally aren’t subject to NIIT on their own. The risk is indirect: taxable withdrawals can raise MAGI and pull your separate investment income into the NIIT calculation. If you track MAGI and net investment income side by side before year-end moves, you can spot the years where the 3.8% tax is most likely to appear.