In investing, a return that sounds big is nice, but its what you get to keep after taxes that counts. Thats a fact that even sophisticated investors can forget.
To make it easier to remember, we have created the following table. It shows at a glance the yield you would need to earn from a taxable investment to equal what you could get from one that is tax-free.
Now, one quick caveat about the table. As you know, everyones tax rate is different. It not only depends on how much you make, but where you live, because some states and even some municipalities (hello, New York City) imposed their own income taxes.
Because I always get cranky when people dont include state and city taxes when they talk about taxable versus tax-free, I took a shot at creating five different combined (federal/state/city) tax brackets that I think would incorporate most folks.
The table works two ways.
You can see how much money you will be left with after taxes, and also figure out the tax-equivalent yield.
For example, say you are in the 31 percent tax bracket, and you are getting a 5.8 percent return on your money. You will be left with a 4 percent after taxes. Conversely, for someone paying 36 percent of their earnings in taxes, an investment with a 6 percent tax-free yield is the equivalent of taxable investment that throws off 9.37 percent annually.
