what is the after tax real rate of 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 both of these factors must be accounted for because they impact the gains that an investor receives this can be contrasted with the gross rate of return and the nominal rate of return of an investment understanding the after tax real rate of returnover the course of a year an investor might earn a nominal real rate of return of 12 on his stock investment but the 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 more off his return say 2 for an after tax real rate of return of 7 the commission he paid to buy and sell the stock also diminishes his return thus to truly grow their nest eggs over time investors must focus on the after tax real rate of return not the nominal rate of return the after tax real rate of return is a more accurate measure of investment earnings and usually differs significantly from an investment s nominal gross rate of return or its return before fees inflation and taxes 1 however investments in tax advantaged securities such as municipal bonds and inflation protected securities such as treasury inflation protected securities tips as well as investments held in tax advantaged accounts such as roth individual retirement accounts roth iras will show less discrepancy between nominal rates of return and after tax real rates of return the difference between the nominal rate of return and the after tax real rate of return isn t likely to be as great on tax advantaged accounts like roth iras as it is on other investments example of the after tax real rate of returnlet s be more specific about how the after tax real rate of return is determined first the return is calculated by determining the after tax return before inflation which is calculated as nominal return 1 tax rate for example consider an investor whose nominal return on his equity investment is 17 and his applicable tax rate is 15 therefore his after tax return is 0 17 1 0 15 0 1445 14 45 0 17 times 1 0 15 0 1445 14 45 0 17 1 0 15 0 1445 14 45 let s assume that the inflation rate during this period is 2 5 to calculate the real rate of return after tax divide 1 plus the after tax return by 1 plus the inflation rate then subtract 1 dividing by inflation reflects the fact that a dollar in hand today is worth more than a dollar in hand tomorrow in other words future dollars have less purchasing power than today s dollars following our example the after tax real rate of return is 1 0 1445 1 0 025 1 1 1166 1 0 1166 11 66 frac 1 0 1445 1 0 025 1 1 1166 1 0 1166 11 66 1 0 025 1 0 1445 1 1 1166 1 0 1166 11 66 that figure is quite a bit lower than the 17 gross return received on the investment as long as the real rate of return after taxes is positive however an investor will be ahead of inflation if it s negative the return will not be sufficient to sustain an investor s standard of living in the future 