Conversion to Roth IRA

[MarkR]

@aj485

However, if their income were instead:
$125k W-2 wage income
$75k investment income (capital gains, dividends and/or interest)
$100k conversion income

Then they would owe NIIT on $50k of the investment income.

Yep. And the other way to look at it (as you alluded to above) is that the last $50k of Roth conversion is effectively being taxed at a rate of 24% + 3.8%. Not directly, but effectively. If this couple wanted to keep Roth conversions at or under 24%, then they could only convert $50k that year.

[aj485]

@MarkR

And the other way to look at it (as you alluded to above) is that the last $50k of Roth conversion is effectively being taxed at a rate of 24% + 3.8%.

Yep. The income taxes generated by the last $50k of Roth conversion would be (24% x $50k Roth conversion) + (3.8% x $50k investment income) = $12,000 + $1,900 = $13,900

Since the $13,900 tax would have been avoided if the last $50k in Roth conversion had not been implemented, the marginal tax rate on that conversion is $13,900/$50,000 = 27.8%, which is what you get when you add 24% + 3.8%

AJ