Your bank has two checking account options, one pays tax-free interest at a rate of 3% per annum and the other pays taxable interest 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.

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