GLOSSARY · INVESTING
Tax drag
The part of an investment's return lost each year to tax on interest, dividends and capital gain distributions while it is held in a taxable account. It works like a yearly fee: small in any one year, large when compounded over decades. It is lowest for low-turnover index funds and zero inside retirement accounts while the money stays there.
Also called: tax cost ratio, tax drag on returns
FORMULA
Yearly tax drag ≈ taxable yield × tax rate on that yield
COMPUTE IT WITH YOUR NUMBERS
LEARN IT PROPERLY
CHAPTER · ADVANCED TAX STRATEGIES · DEEP DIVEHow Taxes Shrink Investment ReturnsCHAPTER · ADVANCED TAX STRATEGIES · DEEP DIVETax-Efficient Funds and Asset LocationRELATED TERMS
SOURCES
- Topic No. 409, Capital gains and losses. Internal Revenue Service.