After-tax real rate of return,
Definition of After-tax real rate of return:
Actual income and capital gains realized by an investor, after paying income tax and making adjustment for the rate of inflation.
Over the course of a year, an investor might earn a nominal rate of return of 12% on his stock investment, but his real rate of 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, say 2%, off his return.
The after-tax real rate of return is the actual financial benefit of an investment after accounting for the effects of inflation and taxes. It is a more accurate measure of an investor’s net earnings after income taxes have been paid and the rate of inflation has been adjusted for. Both of these factors will impact the gains an investor receives, and so must be accounted for. This can be contrasted with the gross rate of return and the nominal rate of return of an investment.
How to use After-tax real rate of return in a sentence?
- The after-tax real rate of return takes into consideration inflation and taxes to determine the true profit or loss of an investment.
- Tax-advantaged investments, such as Roth IRAs and municipal bonds, will see less of a discrepancy between nominal rates of return and after-tax rates of return.
- The opposite of the after-tax real rate of return is the nominal rate of return, which only looks at gross returns.
Meaning of After-tax real rate of return & After-tax real rate of return Definition