After-Tax Real Rate Of Return

AAA

DEFINITION of 'After-Tax Real Rate Of Return'

The actual financial benefit of an investment after accounting for inflation and taxes. The after-tax real rate of return is an accurate measure of investment earnings and usually differs significantly from an investment's nominal rate of return, or its return before inflation and taxes. However, investments in tax-advantaged securities (such as municipal bonds) and inflation-protected securities (such as TIPS) as well as investments held in tax-advantaged accounts such as Roth IRAs will show less discrepancy between nominal returns and after-tax real rates of return.

INVESTOPEDIA EXPLAINS 'After-Tax Real Rate Of Return'

Over the course of a year, an investor might earn a nominal return of 12% on his stock investment, but his real return, the money he gets to put in his pocket at the end of the day, will be less than 12%. Inflation might have been 3% for the year, knocking his real rate of return down to 9%. And since he sold his stock at a profit, he will have to pay taxes on those profits, taking another 2% off his return. The commission he paid to buy and sell the stock also diminishes his return. Thus, in order to truly grow their nest eggs over time, it is essential that investors focus on the after-tax real rate of return, not the nominal return.

RELATED TERMS
  1. Pretax Rate Of Return

    The rate of return on an investment that does not take the taxes ...
  2. Real Interest Rate

    An interest rate that has been adjusted to remove the effects ...
  3. Real Rate Of Return

    The annual percentage return realized on an investment, which ...
  4. Return

    The gain or loss of a security in a particular period. The return ...
  5. Inflation-Adjusted Return

    A measure of return that accounts for the return period's inflation ...
  6. Expanded Accounting Equation

    The expanded accounting equation is derived from the accounting ...
Related Articles
  1. Basic Investment Objectives
    Options & Futures

    Basic Investment Objectives

  2. What Investors Should Know About Interest ...
    Investing Basics

    What Investors Should Know About Interest ...

  3. Capital Gains Tax 101
    Taxes

    Capital Gains Tax 101

  4. 3 Common Tax Questions Answered
    Taxes

    3 Common Tax Questions Answered

comments powered by Disqus
Hot Definitions
  1. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  2. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  3. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  4. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  5. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  6. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
Trading Center