Taxable Equivalent Yields

April 30, 2009 by admin  
Filed under Annuity, Lifestyle, Retirement

Here is a chart that shows a taxable equivalent yield for various interest rates and tax brackets.  For instance, if you are earning 5% tax free with an annuity or a muni bond you would have to earn at 6.94% in a bank CD according to a 28% tax bracket.  Many people thumb their nose at what appears to be relatively low rates for annuities until they are fairly compared to a CD that is taxed annually.Why pay taxes on money you don’t need when you can get the benefits of triple compounding?  What is triple compounding?  It is interest that is compounded on your principal three ways:

  1. Interest on principal
  2. Interest on interest and
  3. Interest on tax savings…because the interest earned is free from current income tax.  Instead of being paid on taxes due to the 1099, it will continue to compound as long as it is deferred.

Tax Free Interest
Rate

Income Tax Brackets*

15% 25% 28% 33% 35%
3.00% 3.53% 4.00% 4.17% 4.48% 4.61%
3.50% 4.12% 4.67% 4.86% 5.23% 5.38%
4.00% 4.70% 5.33% 5.56% 5.97% 6.15%
4.50% 5.29% 5.99% 6.25% 6.72% 6.92%
5.00% 5.88% 6.67% 6.94% 7.47% 7.69%
5.50% 6.47% 7.33% 7.64% 8.21% 8.46%
6.00% 7.06% 7.99% 8.33% 8.96% 9.23%
6.50% 7.65% 8.67% 9.03% 9.71% 10.00%
7.00% 8.24% 9.33% 9.72% 10.45% 10.77%
7.50% 8.82% 9.99% 10.42% 11.20% 11.54%
8.00% 9.41% 10.66% 11.11% 11.94% 12.31%
8.50% 9.99% 11.33% 11.81% 12.69% 13.08%
9.00% 10.59% 11.99% 12.50% 13.44% 13.85%
9.50% 11.18% 12.66% 13.20% 14.18% 14.62%
10.00% 11.76% 13.33% 13.89% 14.93% 15.38%

Taxable Equivalant = (Tax Deferred Interest Rate) X [1 ÷ (1 - Your Tax Bracket)]

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