Review your Investment Portfolio
It is important to review your existing financial plan and investment strategy when making a move. Most people move with the intention of a lifestyle change and their financial plans should be reviewed and updated to reflect these changes as well. Your current investment strategy may not be optimal for your circumstances going forward and the asset allocation and risk profile of your investment portfolio may require changes.
Reviewing Fixed Income Strategy and Portfolio Risk
For starters, yield-oriented strategies may become more attractive when relocating to Florida. Yield is defined as the income return on an investment, which is the interest or dividends received. While qualified dividends are taxed at long term capital gains rates, most interest income is taxable as ordinary income and is therefore subject to ordinary income tax rates.
For an individual living in New Jersey and subject to the top marginal state tax rate of 10.75% and federal tax rate of 37%, this could amount to significant tax savings on interest income. The benefit of tax savings and increased after tax yield can also help improve the risk profile of your investment portfolio. For example, if a NJ resident subject to the top state and federal marginal tax rates is invested in a bond that yields 7%, the after-tax yield would be equal to 3.66%. Alternatively, a Florida resident would only need to invest in a bond that yields 5.81% to achieve an equivalent-after tax yield. This gives investors the ability to achieve the same after-tax return, while holding higher quality investments and reducing the overall risk in the portfolio.
Understand the Appropriate Municipal Bonds to Hold
Additionally, certain investments may no longer be appropriate depending on the state you live in. One example would be municipal bonds. If you own municipal bonds that are tax-exempt from your original home state, the benefit of owning those bonds may be reduced. Because the tax benefit is so attractive, high earners tend to overweight municipals in their home state as part of their fixed income allocation. This too can come with increased risks and investors could benefit from greater diversification within their fixed income allocations after relocating. Diversifying away from your old home state also enables investors to broaden their opportunity set within the municipal asset class, potentially leading to higher yields in other states.
Review Timing of Triggering Capital Gains
Although capital gains qualify for favorable rates at the federal level, any gains, whether short or long term, will be subject to ordinary income taxes at a state level. If you are planning a move to Florida, it may be wise to delay triggering capital gains where possible. In addition, investors may want to consider tax loss harvesting strategies in advance of a move to offset any gains generated prior to the move. Tax loss harvesting is the process in which an investor sells investments within a basket of securities at a loss, while simultaneously replacing them with different investments that have similar characteristics. This enables the investor to maintain their market exposure and generate losses to help offset any capital gains.
Overall, there are several factors that can impact your investment decisions and a portfolio review when moving between states is recommended. In addition, it is important to be aware of the potential tax changes proposed by the Biden administration, particularly a potential capital gains increase. An increase in capital gains could make relocating to Florida even more attractive for high income earners.