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The formula for taxable equivalent yield is: R (te) = R (tf)/ (1- t) Where: R (te) = taxable equivalent yield for the investor. R (tf) = return on tax-free investment (usually a municipal bond) t = investor's marginal tax rate. For example, let's assume Investor A, who is in a 28% tax bracket, is considering whether to invest in a municipal ...
The formula for equivalent taxable interest rate is: R (te) = R (tf) / (1 - t) Where: R (te) = equivalent taxable interest rate for the investor. R (tf) = return on tax-free investment (usually a municipal bond) t = investor's marginal tax rate. For example, let's assume Investor A, who is in a 28% tax bracket, is considering whether to invest ...
A taxable bond often has a lower yield than a municipal bond with the same coupon rate (because the interest from municipal bonds is usually not taxable). For this reason, municipal-bond yields are frequently articulated in terms of the taxable interest rate equivalent to similar corporate-bond rates.
Conversely, if you wanted to compare the two bonds on a taxable basis, you could apply the formula to the tax-exempt City ABC bonds in order to determine what they would have to yield if they were taxable: Yield Equivalence = .06 / (1 - 0.35) = 0.0923 or 9.23%
The average diversified property REIT offers an annual dividend yield of 7.5% -- more than triple the average 2.0% yield paid out by members of the S&P 500 Index. That's money in your pocket. Even better, the cash usually keeps coming in regardless of whether a particular REIT's share price goes up or down.
High yield savings accounts pay much higher interest than the prevailing interest rate. If the current interest rate is 1%, the high yield account may offer 2%, for example. High-yield savings accounts are also FDIC insured. That said, choosing between a money market fund and a high-yield savings account depends on the current interest rate.
Why Do Taxable Preferred Securities Matter? Like taxable bonds, taxable preferred securities have higher pre-tax yields than tax-exempt preferred securities. When comparing taxable and tax-exempt securities, it is always important to adjust the yields so you are comparing them on an apples-to-apples basis (known as ' taxable equivalent yield ').
Tax-Exempt Interest Example. For example, let's assume that John Doe purchases a municipal bond. The bond pays 5% interest per year, or $50 for every $1,000 John Doe invests. That $50 is income to John, which is normally taxable. However, because municipal bonds are tax-free securities, John's interest is tax-exempt.
In fact, due to big depreciation allowances, as much as 90% of the distribution is classified as return of capital and not taxable in the current year. Instead, return of capital reduces the cost basis of the MLP investment and isn't taxed until units are sold (ownership in an MLP is in 'units' rather than shares).
The purpose of this calculator is to show how your balance could grow over time in a high yield savings account. For example, your ending balance will be higher if you increase your monthly savings amount, or if you extend the number of years you save. You can play around with the calculator, changing the numbers to run different scenarios.