After-Tax Investment Return Calculator β Tax Drag Analysis
Calculate annual tax drag from dividends and portfolio turnover. Compare taxable vs tax-deferred vs Roth over 10/20/30 years. Shows how taxes compound against you.
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Total portfolio return before tax
Annual dividends as % of portfolio
% of portfolio sold/replaced each year
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After-Tax Final Value (taxable)
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Pre-Tax Final Value (no drag)
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Total Tax Drag Cost
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Annual Tax Drag (% of portfolio)
Annual Tax Drag Breakdown
How Tax Drag Reduces Investment Returns
In a taxable brokerage account, you owe tax each year on dividends received and on capital gains realized through portfolio turnover. Each dollar paid in tax is a dollar that cannot compound β and over decades, this creates a substantial gap between pre-tax and after-tax wealth.
Tax Drag Formula
Dividend Tax = Portfolio Value Γ Dividend Yield Γ Dividend Tax Rate
Turnover Tax = Portfolio Value Γ Turnover % Γ Avg Gain % Γ LTCG Rate
Annual Tax Drag = Dividend Tax + Turnover Tax
After-Tax Compound Rate = Gross Return β Annual Tax Drag %
Final Value = Initial Γ (1 + After-Tax Rate)^Years β Terminal CGT on unrealized gains
Turnover Tax = Portfolio Value Γ Turnover % Γ Avg Gain % Γ LTCG Rate
Annual Tax Drag = Dividend Tax + Turnover Tax
After-Tax Compound Rate = Gross Return β Annual Tax Drag %
Final Value = Initial Γ (1 + After-Tax Rate)^Years β Terminal CGT on unrealized gains
Extended
Taxable vs Tax-Deferred vs Roth β 30-Year Comparison
Side-by-side projection showing how tax drag compounds over 10, 20, and 30-year holding periods
Compare the same initial investment across three account types: Taxable (annual tax drag), Tax-Deferred Traditional (tax-free growth, pay income tax on withdrawal), and Roth (tax-free forever).
Your marginal rate when withdrawing from Traditional IRA
| Year | Taxable Account | Tax-Deferred (Trad) | Roth (tax-free) | Trad after-withdrawal tax |
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Frequently Asked Questions
What is tax drag and how does it affect investment returns?
Tax drag is the reduction in investment returns caused by taxes on dividends and realized capital gains each year. In a taxable account, you pay tax on dividends and on any gains realized through portfolio turnover β reducing the amount available to compound. Over long periods, even a 0.5β1% annual tax drag can cost you tens of thousands of dollars in lost compounding. The key insight is that taxes paid today cannot compound, so the timing and rate of taxation dramatically affects terminal wealth.
What is the difference between qualified and non-qualified dividends?
Qualified dividends are taxed at the lower long-term capital gains rates (0%, 15%, or 20% depending on income), while ordinary (non-qualified) dividends are taxed at regular income tax rates. To be qualified, dividends must be paid by a US corporation or qualifying foreign company, and you must hold the stock for more than 60 days during the 121-day period around the ex-dividend date. Most S&P 500 index fund dividends are qualified. REITs, money market funds, and short-term bond funds typically pay ordinary dividends.
How does portfolio turnover create tax drag?
Turnover is the percentage of a portfolio replaced each year. When a fund sells positions, any realized gains are distributed to shareholders as taxable capital gain distributions. A 50% turnover rate means half the portfolio is sold each year β generating substantial taxable events. Index funds typically have 1β5% turnover (low tax drag). Active funds may have 50β100%+ turnover, creating significant annual capital gains distributions. Holding individual stocks also allows you to control when you realize gains.
What are the long-term capital gains tax rates for 2026?
For 2026, long-term capital gains (assets held >1 year) are taxed at 0% for income up to $48,350 (single) / $96,700 (married), 15% up to $533,400 (single) / $600,050 (married), and 20% above those thresholds. An additional 3.8% Net Investment Income Tax (NIIT) applies to investment income for single filers above $200,000 and MFJ above $250,000. Short-term gains (held β€1 year) are taxed as ordinary income at rates up to 37%.
How much does a Roth or tax-deferred account save versus a taxable account?
In a tax-deferred account (Traditional IRA/401k), investments grow without annual tax drag β all gains compound until withdrawal. You pay ordinary income tax on withdrawals. In a Roth account, contributions are after-tax but all growth and withdrawals are completely tax-free. The relative advantage depends on your current vs retirement tax rate (for Traditional vs Roth), and the drag eliminated (higher for high-turnover or dividend-heavy portfolios). For a 30-year period with 7% return and 1% annual tax drag, a taxable account might end up 20β25% smaller than a tax-sheltered equivalent.