After tax return
By Jude Wallis
After tax return is the nominal return multiplied by one minus the tax rate applied to it. The difference between the two is the tax drag on that account.
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The multiplication is simple; choosing the rate is not. Interest usually meets the ordinary income rate, qualified dividends and long-held gains meet capital gain rates, and gains inside a tax-deferred or tax-free wrapper are not taxed as they accrue at all. The same investment therefore has several after tax returns depending on where it is held.
Drag compounds. A tax taken every year removes money that would otherwise have been earning, so over a long holding period the shortfall against the pre-tax path is wider than the annual gap suggests. Deferral is worth something even when the eventual rate is unchanged.
Tax is one deduction and inflation is another. Take both and the result is a real after tax return; the real rate is that second step. The after tax return calculator is the haircut, how investments are taxed covers which rate applies, and how real returns work removes inflation.