A Roth conversion is not investment income. It still triggers the 3.8%.

This article first appeared in The Nest Egg, my daily email, on 2026-09-15. Read the original issue. It is educational, not a recommendation for you. The household in it is a hypothetical example, and market figures are as of the date shown and will have changed.

Every figure below names its document. Every calculation is shown. Nothing here is a forecast.

Yesterday the board went red across every index, the VIX added 7.95%, and the ten-year still came down a basis point. Stocks down and bonds up is the market arguing with itself. Worth ten seconds before anything else.

In today’s issue

The tape. Every index closed lower Monday, the VIX jumped 7.95%, and gold gave back 1.29%. Two minutes.

The number Congress froze in 2013. The 3.8% surtax threshold is $250,000 and it has never once been adjusted, because section 1411(b) wrote a dollar amount instead of a formula. Indexed to the consumer price index it would be $359,487 today. Four minutes.

The 27.8% band. A Roth conversion contains no investment income at all, and it still drags your dividends into the surtax. There is an $80,000-wide window where every conversion dollar costs 27.8%, and past the top of it the rate falls back to 24%. The chart shows the hump. Three minutes.

One more thing. The surtax has no line on the 1040. One minute.

The tape

Closing levels and session changes, CNBC US markets, September 14, 2026. Gold and WTI crude are front-month futures settlements.

The story

Congress can write a tax threshold two ways. It can write a number, or it can write a number and a formula that moves it.

Section 1411(b) of the Internal Revenue Code wrote a number. The 3.8% net investment income tax applies to a joint return above $250,000 of modified adjusted gross income, $200,000 for a single filer, $125,000 married filing separately. Those three figures appear in the statute as fixed dollar amounts with no cost-of-living provision anywhere in the section. They took effect for tax years beginning after December 31, 2012, and they are the same three figures today.

Now price what has happened underneath them. The Bureau of Labor Statistics put the consumer price index for all urban consumers at 232.957 for the 2013 annual average. On September 11, 2026, it reported August 2026 at 334.980.

$250,000 x (334.980 / 232.957) = $359,487

That is what the threshold would be if it had been indexed the way the standard deduction, the tax brackets, the estate exemption and the capital gains breakpoints all are. It is not. It is still $250,000, which in 2013 purchasing power is now worth $173,859.

The line lost 30.5% of its real value while sitting perfectly still.

The position

A married couple, 72 and 70, filing jointly. $1,600,000 in a taxable brokerage account yielding 5.0%, which throws off $80,000 a year in interest, dividends and capital gain distributions. $1,200,000 in a traditional IRA. Combined Social Security of $74,000, of which 85% lands in adjusted gross income.

Neither has started required distributions yet. Under the SECURE 2.0 Act those begin at 73, which means they are sitting in the window every planner tells them to use: the years after the paycheck stops and before the IRA starts forcing money out.

So they are doing the textbook thing. This year they convert $150,000 from the traditional IRA to a Roth.

Their adjusted gross income before the conversion is $80,000 plus $62,900 of taxable Social Security, or $142,900. Comfortably under the line.

The arithmetic

Section 1411(a)(1) charges 3.8% on the lesser of net investment income or the amount by which modified adjusted gross income exceeds the threshold. Both halves matter, and almost everyone only watches one.

Before the conversion. MAGI $142,900, which is $107,100 below the threshold. Surtax owed: $0.

After the conversion. MAGI is $142,900 plus $150,000, or $292,900.

Excess over the threshold: $292,900 − $250,000 = $42,900 Net investment income: $80,000 The lesser of the two: $42,900 $42,900 x 3.8% = $1,630.20

Read what just happened. Not one dollar of that $150,000 conversion is net investment income. Section 1411(c)(5) specifically excludes distributions from qualified plans and IRAs from the definition. The conversion is not taxed by this provision at all.

It is in MAGI. MAGI is the gate. The conversion opened the gate, and the 3.8% landed on dividends and interest the couple never touched and did not sell.

The same gate opens much wider in the year an owner sells a company. A seven figure gain can push MAGI millions past $250,000, which is why what to do with the money after you sell your business starts with setting the tax aside before investing a dollar.

What the frozen number cost them. At an indexed threshold of $359,487, their MAGI of $292,900 sits $66,587 below the line and the surtax is $0. The entire $1,630.20 exists because a 2013 statute wrote a number instead of a formula.

Now the part that changes behavior. Under Revenue Procedure 2025-32 the 2026 standard deduction on a joint return is $32,200, plus $1,650 each at 65 or older, so $35,500. That puts the 24% bracket in reach at $246,900 of MAGI and the 32% bracket at $439,050.

Stack the surtax on top and the marginal rate on each conversion dollar goes like this:

Up to $246,900 of MAGI: 22.0% $246,900 to $250,000: 24.0% $250,000 to $330,000: 27.8% $330,000 to $439,050: 24.0% Above $439,050: 32.0%

The band ends at $330,000 because that is where the excess over the threshold finally equals the $80,000 of investment income. Past that point the surtax is capped at $3,040 and stops growing, so the next conversion dollar costs 24 cents again, not 27.8.

2026 brackets per Revenue Procedure 2025-32; surtax mechanics per 26 U.S.C. 1411(a)(1) and (b). Hypothetical illustration of published rates, built to show arithmetic. Not a projection of any reader’s result.

There is a hump in the middle of the range, and stopping inside it is the single most expensive place to stop.

What the four of them would say

The portfolio manager. The $80,000 is not fixed, it is a policy choice. A taxable account built out of municipal interest and low-turnover funds throws off a smaller number, and a smaller number narrows the band. The surtax is charged on what the account distributes, not on what it is worth.

The CPA. Watch the word lesser. Two levers set this bill and most people only pull one. Cutting investment income lowers the cap, and cutting MAGI lowers the excess. In the band, only the MAGI lever is doing anything, because the excess is the smaller of the two.

The financial planner. A conversion plan that stops at a round number is a plan that ignores the shape. The rate on conversion dollars is 27.8% between $250,000 and $330,000 of MAGI and 24% on either side of that, so a round number chosen for no reason can easily park them at the worst point on the curve.

The estate attorney. Section 1411 does not apply to distributions from qualified plans, but it does apply to undistributed net investment income of estates and trusts, and the threshold there is the dollar amount at which the top trust bracket begins, which is indexed and an order of magnitude smaller. An inherited taxable account held inside a trust reaches the 3.8% almost immediately, which is a very different arithmetic than the one above.

One more thing

There is no line on the Form 1040 that says net investment income tax. It is computed on Form 8960 and arrives as part of a single total on the other taxes line.

That is why a household can pay it for a decade without ever once seeing it. It never appears as its own number on the return they actually read, and no software prompts them before the conversion that creates it.

Every figure in this letter names its document so you can go look. That is the whole product.

Tomorrow

The conversion above has a second bill attached, and it does not arrive until 2028. Medicare reads the tax return you filed two years ago, and the first bracket is a cliff rather than a ramp. We will price it.

Sources

Market levels, close of September 14, 2026: CNBC US markets. The 3.8% tax, its thresholds in (b) and the qualified plan exclusion in (c)(5): 26 U.S.C. 1411. IRS Topic 559. IRS Form 8960. Consumer Price Index news release, August 2026, published September 11, 2026: Bureau of Labor Statistics. CPI-U historical annual averages. Revenue Procedure 2025-32.

The conversation a portfolio manager, a CPA, a financial planner and an estate attorney would have about your money if the four of them were ever in the same room. None of them ever talk to each other. This is that room, every weekday at 6:45am, sized to a portfolio between $500,000 and $5,000,000.

The Nest Egg is educational material published by a registered representative. It is not tax, legal or investment advice, and it is not an offer or solicitation. Every case shown is a hypothetical illustration of published rates, built to demonstrate arithmetic, and is not a projection of any reader’s result. Tax outcomes depend on facts this letter does not know. Consult your own tax and legal advisors before acting.