Now that the unit trust industry is competing head-on with the banking industry for your short-term savings and investments, interest rates on offer to you are sky high.
But how do you know if you are getting a good deal after tax and after taking inflation into account. In other words, what is the real golden rate? The answer is that it depends on your marginal tax bracket and the inflation rate.
The higher the inflation rate and the higher your marginal rate of tax, the more you need to earn in interest if you are to get a real rate of return. The real rate of return is what you get after tax and inflation are taken into account.
At the current inflation rate of 9,6 percent you need to get an interest rate of at least 17,5 percent if you are on the top marginal rate of 45 percent before you are in the gain territory.
However, if you are lower down the income scale and only pay a marginal rate of tax of 19 percent then the break-even point is 11,9 percent.
These calculations do not take account of the fact that the first R2 000 you earn in interest is tax free. However, any amount above R2 000 is taxed at your full marginal rate.
YOUR GOLDEN INTEREST RATE
MARGINAL TAX BRACKET
MARGINAL RATE
BREAKTHROUGH POINT
0 - 30 00019%11.9%
30 001 - 35 00030%13.7%
35 001 - 45 00032%14.1%
45 001 - 60 00041%16.3%
60 001 - 70 00043%16.8%
70 001 - 100 00044%17.1%
100 00045%17.5%