Risk / Return Trade-Offs: Example 4 Taxable vs. Tax-Exempt Investments
{"Image DocumentName": "Risk / Return Trade-Offs: Example 4 Taxable vs. Tax-Exempt Investments", "Image ImageDescription": "Taxable or tax-exempt investments. As a result of income taxes, you require significantly greater investment returns to reach a particular goal. For example, if you are in the 28 percent tax bracket, you would need to purchase a taxable investment earning more than 6.9 percent to outperform a 5 percent tax-exempt investment. Taxable Tax-exempt. Investment  1000  1000. Rate of return 6.9% 5.0% Investment income Less taxes - 19 N/A. Investment income after taxes   50   50. In the 33 percent tax bracket, you would need a 10.4 percent taxable return to be able to keep 7 percent after taxes. The best outcome where taxes are concerned, of course, is not to have to pay them. That s a major reason why many investors favor municipal bonds. Interest on municipal bonds is not generally subject to Federal income taxes, although state or local income taxes may be due if you own municipal bonds issued outside your home state. (Capital gains on municipal bond investments are subject to Federal capital gains tax.) Municipal bonds, however, may not be suitable for your investment strategy. For example, you may need the long-term growth offered by common stocks. Unfortunately, all earnings from common stocks are taxable. This brings us to the next-best outcome where taxes are concerned, and that is to delay or defer them as long as possible. The longer you can keep your money from being taxed, and leave all your earnings free to compound, the easier it will be for you to reach your goals. Tax-equivalent return. You can use the following formula to calculate the tax-equivalent return on a municipal bond: Tax equivalent return = tax-exempt return/(1-marginal tax rate) To learn more about tax exempt investments, see the Tax Planning online course in PwC eAdvisor.", "Image XResolution": "37", "Image YResolution": "37", "Image ResolutionUnit": "Pixels/Centimeter", "Image Software": "SlidePlayer", "Image YCbCrPositioning": "Centered"}