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IRA Distributions Are Not Subject to the New 3.8% Surtax


As you may be well aware, beginning in 2013 there will be a brand spanking new tax added to unearned income if your Modified Adjusted Gross Income is greater than $200,000 for Singles, and $250,000 for Married Filing Jointly.  Married folks filing separately are affected above a $125,000 threshold.  This surtax is to help bolster the Medicare system, and it applies specifically to unearned income.

What’s important to know is that IRA distributions (among other things) are not included as impacted by this new surtax.  This means that when you make significant IRA distributions (beginning in 2013), such as to convert to a Roth IRA, this surtax will not be applied to your distribution.

Other types of unearned income that are specifically exempted from this surtax includes tax-free interest and other payouts from retirement plans such as 401(k) plans, deferred compensation plans, and pension plans.

Income that is subject to the new surtax includes interest, dividends, capital gains, annuities, royalties, and passive rental income.

None of these types of income are subject to the other brand spanking new tax – the 0.9% Medicare surtax on earned income.  This one is only applicable to wage income and income from self-employment, and it applies above the same income thresholds as those listed above.  Once an employee’s wages are above those levels, the additional 0.9% surtax will be withheld from the employee’s wages.  The employer does not have to pay a complimentary 0.9% as with all other Medicare tax payments.

For the self-employed, the surtax will be applied when you make your quarterly estimates or when you file Schedule SE at the end of the year.

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  1. clydewolf says:

    Taxable distributions from your 401k or IRA will be added to your MAGI and may push your MAGI above the threshold.

    Roth distributions from your 401k, ROTH IRA will not be added to the MAGI.

    1. jblankenship says:

      Great points, Clyde. Even if the distribution itself isn’t specifically subject to the additional tax, taking the distribution could cause other income to become subject to the additional taxes.

      Thanks for sharing!


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