# How to calculate effective interest rate after taxes?

• Mar 11th 2013, 12:05 AM
Eraser147
How to calculate effective interest rate after taxes?
my problem states comparing taxable savings accounts to non-taxable IRAs with pre and post tax investment. Suppose at age 25 you earn \$100 and are in a 30% tax bracket, how much will you have left after taxes? Now take that post tax money and put it in a savings account earning 8%/year interest. Your gain gets taxed at the end of every year. Assume that you leave everything in the savings account (except the amount you owe in taxes) so interest is in effect compounded yearly. What is the effective interest rate that you are earning each year after taxes?
• Mar 11th 2013, 01:48 PM
Eraser147
Re: How to calculate effective interest rate after taxes?
Nobody knows? Really?
• Mar 11th 2013, 03:05 PM
Shakarri
Re: How to calculate effective interest rate after taxes?
I don't know the tax system well but if you have \$100 to put in a bank and you get 8% interest on it, at the end of the year you have \$108 to be taxed, if the tax rate is 'r' then you will have 108*(1-r) dollars left after DIRT tax. You are earning 1.08*(1-r) interest on your savings.
This assumes that when receiving monthly interest that the government taxes you on it AFTER you receive your interest after the 12th month.