When the Affordable Care Act introduced the Net Investment Income Tax in 2013, the 3.8% surtax was framed as a levy on the wealthy. The income thresholds — $200,000 for single filers and $250,000 for married couples filing jointly — were meant to capture only the top sliver of households. Thirteen years later, those thresholds have never been adjusted for inflation, and a tax originally designed for high earners is now reaching deep into the upper-middle class. For retirees with required minimum distributions, dividend-paying portfolios, or rental income, the NIIT is increasingly part of the annual tax bill whether they expected it or not.
How the Tax Works
The NIIT adds 3.8% on top of regular income tax, but only on certain kinds of income. Interest, dividends, capital gains, rental and royalty income, and non-qualified annuity distributions are all considered net investment income. Wages, Social Security benefits, and qualified retirement plan withdrawals — 401(k), traditional IRA, and Roth distributions — are not.
The tax applies when two conditions are both true: you have net investment income for the year, and your modified adjusted gross income (MAGI) exceeds the filing-status threshold. The 3.8% is applied to the lesser of your net investment income or the amount of MAGI above the threshold.
The Bracket Creep Problem
The thresholds are written into statute and not indexed: $200,000 single and head of household, $250,000 married filing jointly, $125,000 married filing separately. According to Congressional Research Service analysis, the $250,000 joint threshold sat near the 98th percentile of household income when it took effect. By 2026, it has slid closer to the 80th percentile, and the slope continues every year inflation pushes nominal incomes higher.
For retirees, the effect is particularly sharp. Required minimum distributions are not subject to NIIT directly, but they raise MAGI. A higher MAGI then exposes investment income — taxable bond interest, brokerage account dividends, capital gains from rebalancing — that would have escaped the surtax in a lower-income year.
What Retirees Can Do
A few moves can keep portfolio income from being eroded by the surtax.
Run Roth conversions before RMDs begin. Converting traditional IRA balances to Roth in your 60s, before the RMD age of 73 kicks in, lowers future RMDs and the MAGI they generate. Conversion income itself does not get hit by NIIT, but it does count toward MAGI in the year of conversion, so the conversion size needs to be modeled against the threshold.
Use Qualified Charitable Distributions. A QCD sends up to $111,000 in 2026 directly from an IRA to a qualified charity, satisfying part or all of the RMD without raising MAGI. For charitably inclined retirees, this is one of the cleanest tools for keeping income below the NIIT line.
Consider municipal bond interest. Interest from qualified municipal bonds is excluded from both regular income and net investment income, making it doubly useful for retirees who already brush against the threshold.
Harvest losses deliberately. Realizing capital losses to offset gains lowers net investment income directly. Coordinating sales across taxable brokerage accounts can keep the 3.8% from compounding on top of regular capital gains rates.
The Long View
Without legislation, the NIIT will continue to capture a larger share of retirees every year. Planning around it is less about avoiding investment income and more about controlling when that income lands. Retirees with diversified holdings — including allocations to precious metals or other assets that do not throw off annual interest or dividends — have additional flexibility in choosing when to realize gains.
The 3.8% is not catastrophic on its own. But layered on top of federal and state income tax, IRMAA Medicare surcharges, and capital gains rates, it is another reason coordinated withdrawal planning matters more in retirement than at any earlier stage.
Sources: Internal Revenue Service, Congressional Research Service, Fidelity, Ameriprise Financial, Kahn, Litwin, Renza & Co.