Moving? Why It May Be Time to Update Your Investment Portfolio

Every year, millions of people in the U.S. relocate to a new state, some to take advantage of new, remote-working options, others for new jobs, retirement or family reasons. Whatever the prompt, moving can mean lots of changes, from new employers and commutes to schools and neighbors.

But it may also raise new tax issues for your investment portfolio. And as with every item on your move to-do list, you want to be prepared for any impact. First, consult your tax advisor about whether your new state has different rate or rules. Then, be sure to discuss these three factors with your Financial Advisor: 

Moving to a state with lower state income and capital gains taxes can mean higher after-tax returns on your investments. And even a modest difference in after-tax returns, compounded over time, can add up to material differences for a portfolio.

For example, a California investor would pay 60 basis points more in taxes on their returns than an investor in Texas, assuming they’re both in the highest marginal tax bracket. Over a 20-year period, that seemingly small difference would see a Texas resident get $600,000 more in wealth accumulation than a California resident on a $2.5 million portfolio of 50% stocks and 50% bonds, based on current return expectations.¹

Not all investments are taxed the same, so moving to a different state may change the attractiveness of certain asset types relative to others. For example, moving to a lower-tax state might increase the draw of so-called bond substitutes, such as relative-value hedge funds and certain real asset strategies that are less tax-efficient but provide a better hedge against rising inflation and interest rates.

Different effective tax rates can also affect the best type of investment manager to use. For example, actively-managed funds tend to buy and sell assets more frequently than passive funds, and therefore tend to be less tax-efficient. A lower effective tax rate can increase the attractiveness of their potential to deliver diversification and additional returns. 

While municipal bonds are generally exempt from federal taxes, they’re also often exempt from state and local taxes if the investor lives in the state that issued the bond. That exemption has made these bonds more attractive for many taxpayers recently, since reforms passed in 2017 capped the deductibility of state and local taxes, increasing effective state and local tax rates.

If you’ve moved out of a state whose bonds you continue to hold, you’ll likely face a choice: hold onto them and potentially lose any state and local tax exemption or sell them and possibly trigger capital gains tax liability. The right answer for you will depend on several factors, including:

• the post-tax yield on available alternate investments
• whether you have capital losses to offset your gains
• how changes to your allocation strategy might impact the rest of your portfolio

Additionally, if you were contributing to a 529 college savings account in a state that provides state tax benefits, but you’re moving to a state that does not, be sure to evaluate any implications for future contribution decisions.

Clearly, relocating may affect your investment portfolio in unexpected ways. Your Morgan Stanley Financial Advisor can create a personalized investment approach that will work for you as you navigate your move and work through its tax implications. No matter where you live, our suite of tax-efficient solutions, like Morgan Stanley’s, Total Tax 365, can help you determine how to potentially save on taxes all year long and keep more of what you’ve earned. 

• What is the potential impact on my portfolio of income and capital gains tax rates in the state I'm moving to?
• Are there certain types of assets or funds I should reconsider for my portfolio once I've moved?