Taxable Equivalent Yield
One way to measure the difference between taxable and tax-deferred investments is by determining the taxable equivalent yield of a tax-deferred asset. The taxable equivalent yield is the yield necessary on taxable investments to grow the same amount of money as a tax-deferred annuity according to an individual's income tax bracket. The taxable equivalent yield formula is:
Tax-deferred yield / (100% - tax bracket)
Example:
An individual in the 33% marginal income tax bracket owns a deferred annuity that is presently earning 5% interest. This individual's taxable equivalent yield is 7.46% [calculation: 0.05 ÷ (1.00 - 0.33) = 7.46%].
That is, this individual in the 33% income tax bracket who owns a tax-deferred annuity yielding 5% would need a taxable investment yielding 7.46% to generate the same amount of money.


VS.

Tax-Deferred Yield
The flip side of the taxable equivalent yield is the tax-deferred yield, which defines the amount of tax-deferred yield needed to match the yield of a taxable investment. The tax-deferred yield is:
(100% - tax bracket) × taxable yield.
Example:
An individual in the 33% marginal income tax bracket owns a taxable investment that is presently earning 6% interest. This individual's tax-deferred yield is 4% [calculation: (1.00 - 0.33) × 0.06 = 4%].
That is, this individual in the 33% income tax bracket who owns a taxable investment yielding 6% would need a tax-deferred annuity yielding 4% to generate the same amount of money.