Fixed Income Investments
First, an individual should determine how each return on an investment is taxed. Second, they should subtract the tax from the pre-tax return to determine the after-tax return. Armed with this information, they can now compare the risk characteristics of each investment and decide if the difference in the return compensates them for the varying degrees of risk assumed. The investment that is selected should be based on a trade-off between risk and return that is acceptable to them.
Here is an example of risk/return trade-off. With a certificate of deposit (CD), the investment is insured up to $100,000, the return is certain, and the capital is at a low risk as long as the CD is held to maturity. Since this vehicle is such a low-risk investment, it carries a low after-tax return.
In an effort to make correct estimates of the after-tax returns on fixed income securities, you should consult your tax advisor. He or she will help you determine the various ways in which returns on specific fixed income securities are treated for tax purchases on your particular federal and state tax returns and will help you determine the marginal federal and state income tax rates that are applicable in your situation. An investment professional can provide further detail about fixed income securities.