Smarter investing for college and retirement.
The Johnsons, with a combined income of $450,000 and $2.1 million in retirement accounts, are facing the challenge of funding three children's college education while simultaneously maximizing their retirement savings. They're unsure whether to prioritize taxable bonds with higher yields or tax-exempt municipal bonds, given their high tax bracket. They need a clear understanding of the after-tax returns of each investment option.
By using the Tax Equivalent Yield Calculator, the Johnsons compared a taxable bond yielding 5% to a municipal bond yielding 3.5%. Considering their combined federal and state income tax rate of 37%, the calculator revealed that the 3.5% tax-exempt municipal bond was equivalent to a 5.56% taxable yield. This informed decision allows them to reallocate $100,000 into municipal bonds, generating an additional $560 in annual after-tax income, effectively saving $2,240 in taxes annually on that portion of their portfolio compared to the taxable bonds.
The Tax Equivalent Yield Calculator simplified the process of comparing investment options by directly calculating the equivalent taxable yield of tax-exempt investments based on the Johnsons' specific tax bracket. This eliminated the need for manual calculations and reduced the risk of errors.
$2,240 in annual tax savings on $100,000 reallocation, potentially leading to $47,000 tax-advantaged investment over 20 years due to compounded returns.
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