Investing and Taxes

How do I compare the yields of tax-exempt investments and their taxable investment equivalents?

You may compare the difference between the yields of tax-exempt investments and taxable investments by performing a calculation. First, find the yield of your tax-exempt investment (say 5%). Then subtract your tax bracket from one, and express it as a decimal (if your tax bracket is 25%, then 1.0 minus 0.25 equals 0.75). Then divide the tax-free yield by the tax bracket computation (5% divided by 0.75 equals 6.67%). This means an investor in the 25% tax bracket would need a taxable investment to pay at least 6.67% in order to receive an equivalent amount of income from another taxable investment.


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