Question of the Month: Does
the 3.8% investment surtax apply to retirement funds?
Q: Does the 3.8% investment surtax apply to retirement funds? For example, if I take a lump-sum distribution of my 401(k) plan, which holds employer stock, will the basis be taxed at 3.8% on top of income tax?
A: The investment surtax of 3.8% does not apply to MOST retirement payments. It could apply to certain non-qualified annuity payments. However, the retirement payment will increase your income and COULD put you over the threshold to where the surtax will apply. For example, the surtax will apply if modified adjusted gross income (MAGI) is over $250,000 (married/joint). If a couple's MAGI is $235,000 and they take a $25,000 IRA distribution, it increases the MAGI to $260,000, making some of their investment income subject to the surtax.
