Your bank has two checking account options, one pays tax-free interest at a rate of 3% per annum and the other pays taxable inte
rest at a rate of 4.5% per annum. You are currently in a 24% marginal tax bracket. If you converted the tax-free interest rate to the comparable taxable interest rate you would find that:
The comparable tax rate is 3.95%, thus you should choose the 4.5% taxable account option.
Step-by-step explanation:
In order to convert the tax-free interest rate of 3% per year to the comparable taxable interest rate, one should consider that 3% is the interest rate after the marginal tax discount. If you are at the 24% marginal tax bracket, the comparable rate is:
The comparable tax rate is 3.95%, thus you should choose the 4.5% taxable account option.