Tax Drag on Equity Returns
Use this file when: Comparing strategies or evaluating after-tax return implications.
The Data
“Avg Ann Total Return pre-tax: 9.5%. Post-tax (401k): 8.2%, drag: -1.3%, -14% of total returns. Post-tax (Brokerage): 7.9%, drag: -1.6%, -17% of total returns. Avg Ann Real Return pre-tax: 6.2%. Post-tax (401k): 4.9%. Post-tax (Brokerage): 4.6%.” — a-00026
| Account Type | Nominal Return | Real Return | Annual Tax Drag |
|---|---|---|---|
| Pre-tax | 9.5% | 6.2% | — |
| 401k/IRA | 8.2% | 4.9% | -1.3% |
| Taxable brokerage | 7.9% | 4.6% | -1.6% |
Taxes consume 14-17% of total nominal returns. Over 30 years, 1.6% annual drag compounds to a ~50% difference in terminal wealth vs tax-advantaged.
Practical Application
- Maximize tax-advantaged accounts first before taxable brokerage for identical assets
- High-turnover strategies carry higher tax drag than buy-and-hold
- High-yield strategies (dividends, bond coupons) have higher ordinary income tax treatment
- Gold in taxable accounts: taxed at collectibles rate (28%) — vs 20% for long-term equity gains; favor gold in tax-advantaged accounts
- After-tax returns are the relevant metric for all strategy comparisons