Moving? Why it may be time to consider updating your portfolio

Every year, millions of people in the US relocate to a new state. ¹ Some do so to take advantage of new, remote-working options, and others for new jobs, retirement, or family reasons. Whatever the reason, moving can mean lots of changes, from new employers to new 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 rates or rules. Then, you may want to consider these three factors:

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.

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 may provide a better hedge against rising inflation and interest rates.

You may also want to consider the fact that different effective tax rates can also affect the type of investment manager to use. Actively managed funds, for example, actively tend to buy and sell assets more frequently than passive funds and therefore tend to be less tax-efficient. 

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 generally made these bonds more attractive for many taxpayers, 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: whether to 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.

All that said, relocating may affect your investment portfolio in unexpected ways. Tax and portfolio planning can help you better manage your portfolio and determine how to potentially keep more of what you’ve earned. 

The source of this article, Moving? Why it May Be Time to Update Your Investment Portfolio, was originally published on May 12, 2022.

1. Ruby Home, "Moving Statistics: Industry Trends & Data (2023)"

CRC # 3701110  08/2024