1 We assume $1,000 is invested in taxable and after-tax 401(k) accounts, with a 100% active equity allocation, with a holding period of 20 years. We assume an annual 10% pre-tax return (including a 2% annual dividend), as well as a 100% turnover rate. Capital gains are realized every year, but are taxed at different rates (short-term and long-term capital gains), in shares calculated from the assumed turnover rate. Assets in the after-tax 401(k) account are distributed at the end of the investment horizon and that gains are taxed as ordinary income. We assume that the investor is in the top marginal federal and state (CA) tax brackets (37% and 13.3%, respectively) and a net investment income tax rate of 3.8%. For more information, see exhibit 2 in the Global Investment Committee special report, Preparing for the Next Tax Regime: Six Steps to a More Tax-Efficient Portfolio.
2 Represented by the median return relative to benchmark of top quartile active US equity managers over the trailing 20 year period, roughly 50 basis points per year (pre-tax). Source: Morningstar, Morgan Stanley Wealth Management Global Investment Office as of June 30, 2024. For additional details, see the Global Investment Committee special report, Preparing for the Next Tax Regime: Six Steps to a More Tax-Efficient Portfolio.
3 Key restrictions for traditional IRAs include partial or no income deductions for contributions made by high earners, among other considerations. For more information, see exhibit 4 of the Global Investment Committee special report, Preparing for the Next Tax Regime: Six Steps to a More Tax-Efficient Portfolio.
4 See hypothetical investor case discussed in endnotes below. Also, refer to exhibits 6 and 7 in the Global Investment Committee special report, Preparing for the Next Tax Regime: Six Steps to a More Tax-Efficient Portfolio.
End notes from the Global Investment Committee special report, Preparing for the Next Tax Regime: Six Steps to a More Tax-Efficient Portfolio. FOR EDUCATIONAL USE ONLY
This report is based on tax law in effect at the time of its publication. Subsequent changes in tax law may have an impact on the strategies outlined.
Given the impact of individual circumstances on the assessment of estate tax, such as the amount of lifetime exemption used and size of overall estate, we exclude estate taxes from scenarios below that are focused on wealth transfer after the investor passes away.
Methodology for added return estimates
Tax-rate assumption: Unless otherwise stated, the tax rates assumed throughout the report are as follows: a 37% federal tax bracket, 3.8% net investment income tax rate (Medicare surtax) and 5.2% state tax rate.
Capital Market Assumptions: Unless otherwise stated, asset return assumptions are based on the Global Investment Committee’s (GIC’s) capital market assumptions (published March 2024). Return scenarios are simulated using Monte Carlo analysis, with the GIC’s strategic assumptions used for the first seven years and secular assumptions used afterward.
Simulation: Unless otherwise stated, estimates for each strategy are modeled using 10,000 simulations of different market scenarios, using Monte Carlo analysis and the GIC’s capital market assumptions.
Tax-Advantaged Account: Our estimate for value-add is modeled as follows: Assume an investor could invest assets in either a taxable account or a common government-sponsored tax-advantaged retirement account. We compare the performance across both account types, measuring the post liquidation values after 40 years of simulated growth. Both account types hold the same asset allocation of 50% equities, 20% fixed income and 30% alternatives. We calculate internal rate of return (IRR) for the tax-advantaged account by measuring the after-tax equivalent amount of the initial contribution and the post liquidation value in order to calculate annualized gain. The IRR of the taxable account is measured similarly, though the initial investment is sized as an equivalent after-tax dollar amount assuming 100% cost basis.
Municipal Bonds: Our estimate for value-add is based on the historical average spread between the after-tax equivalent yield of 10-year US Treasury bonds and 10-year municipal bonds, measured between Jan. 5, 2001, and Sept. 9, 2024.
Direct Indexing/Tax-Loss Harvesting: Our simulation follows the method elaborated in the June 2024 Morgan Stanley Wealth Management Global Investment Office report, “Direct Indexing: Opportunities for Customization and Potential Tax Alpha.” Our estimate for value-add is calculated as the post liquidation IRR for a direct indexing strategy, assuming fees of 30 basis points per year. Our simulation runs 100 trials, with 10,000 iterations in each trial, in order to calculate the average IRR benefit across the 100 trials. We then compare this IRR to a baseline that is invested in a passively managed ETF, modeled as having zero fees and expenses. The simulation horizon used is five years.
Exchange Funds: Our estimate assumes that an investor owns a concentrated position that has a cost basis equal to 10% of its current market value and seeks to diversify into broad market exposure using an exchange fund. We calculate value add as the difference in IRR between a scenario in which the investor exchanges their current concentrated position for shares in an exchange fund and a scenario in which they liquidate their concentrated position and invest the after-tax proceeds into 100% passive US equity exposure. In both cases, return assumptions follow the GIC’s 2024 capital market assumptions and assume 0% turnover. The simulation horizon is 20 years. We assume that the exchange fund is held for seven years, that its underlying holdings are composed of 80% passive US equity and 20% private real estate exposure and that it charges an annual account fee of 0.92% of assets under management during the seven years. After seven years, the investor’s shares in the exchange fund are redeemed in exchange for a basket of diversified US equity shares, which the investor holds for an additional 13 years.
Tax-Aware Long-Short Strategies: Our estimates source assumptions for the pace and magnitude of realized net capital loss possible in this strategy from “Beyond Direct Indexing: Dynamic Direct Long-Short Investing” (cited below), following the authors’ analysis of a “relaxed-constraint” method and the 150%/50% long/short leverage approach. Our calculations assume an investment horizon of 10 years and rely on the GIC’s secular capital market assumptions for US equities. We conservatively assume that there is no additional investment alpha provided by the manager of the long-short strategy, and thus our estimates represent only the tax alpha added. Total expenses are assumed to be 1%. We calculate value-add by measuring the cumulative realized net capital loss and assume that funds grow tax-deferred. After 10 years, assets are liquidated and taxes paid.
Investment-Only Variable Annuity: Our estimate for value-add assumes that an equivalent amount of after-tax funds ($1 million) is invested in either an IOVA (bought in a nonqualified account) or a taxable account. Both strategies are invested in a 100% active equity portfolio with an annual turnover rate of 100% and are held for 40 years. Based on prevailing prices, we assume that the IOVA charges 0.95% of assets under management annually. After 40 years, we assume that gains in the IOVA are taxed as ordinary income in order to calculate post-liquidation value. We then calculate the IRR for each strategy and use the difference to represent the added return potential of an IOVA.
Indexed and Variable Universal Life Insurance: Our estimates for value-add assume an equal amount of assets ($400,000) is used to either buy life insurance, contributed as premiums over a period of 10 years, or invested in a taxable account. The taxable account is assumed to be invested in investment grade bonds to compare with Index Universal Life insurance (IUL) and invested in equities to compare with variable universal life insurance (VUL). We calculate IRR based on each insurance policies’ tax-free death benefits and compare these IRRs to the IRR achieved using the taxable portfolio’s ending value, assuming a cost basis step-up (equal to pre-liquidated value) upon the account holder’s death at age 85.
Life insurance quotes assume the policyholder is a 45-year-old male non-tobacco user. Premiums are paid for both insurance policy types in a size of $40,000 per year for 10 years. These premiums are subject to a premium-based administrative charge and a sales charge that sum to 10% and 4.75% for IUL and VUL policies, respectively, plus a transaction charge of 9.5% and 3.7%, respectively, calculated against the remaining premium amount. During the first 10 years, both policies offer an initial death benefit of $619,564. After 10 years, the death benefit option in both life insurance contracts is switched from an increasing amount to a level amount, subject to the minimum required death benefit defined in US Code §7702.
We assume that both IUL and VUL policies also charge a policy expense of $144 per year. The monthly cost of insurance rate varies by age, ranging from 0.00767% at age 46 to 0.01902% at age 85 and is sourced from the Prudential CPII Specimen Contract document (as of September 2024) to represent current prices available. For the IUL policy, we assume the subaccount credit rate is linked to the price performance of the MSCI All County World Index and subject to a floor rate of 0% and a cap at 10.25% per year.
Private Placement Variable Annuity: Our estimates of value add assume that an equal amount of assets ($1 million is invested in either a private placement variable annuity (PPVA) or a taxable account and assume that 100% of funds are invested in alternatives, modeled as broad hedge funds, within each structure. IRRs are based on the liquidated values for both the PPVA and the taxable account, after a simulated holding period of 40 years. Representative of current prices, we assume that the PPVA charges a 1% sales load. Separate account charges are applied every year, including an account maintenance charge and an asset-based distribution charge.
Current account maintenance charge is modeled as follows: 0.30% for assets below $20 million, 0.25% for assets between $20 million and $40 million, and 0.20% for assets of $40 million and over. The current asset-based distribution charge is modeled as follows: 0.05% for assets below $25 million and 0.00% for $25 million and over.
Private Placement Life Insurance: Our estimates of value-add assume that an equal amount of assets ($3 million) is invested in either private placement life insurance (PPLI) or a taxable account, assuming 100% of funds are invested in alternatives, modeled as broad hedge funds, within each structure. We assume the investor begins at age 50 and dies at age 90, for a 40-year investment horizon in both scenarios.
IRRs for PPLI are based on the amount distributed, income tax-free, after the policyholder’s death and are compared to the IRR of the taxable portfolio, measured using its ending value after the same period of time and assuming a step-up in cost basis (equal to pre-liquidation value) upon death of the account holder.
We model the PPLI premium as $1,000,000 per year for three years, with an initial death benefit of $12,527,000. Sales load, deferred acquisition charge and state premium tax are each charged on the premium. Sales load charge is 1.75% for a premium below $2.5 million and 1.25% for a premium from $2.5 million to $5 million. Deferred acquisition charge is 0.7%, and state premium tax is 2%. Cost of insurance (COI) charge is based on client’s age and health, and is based on net value at risk. Separate account charges are applied every year, including an account maintenance charge and an asset-based distribution charge. Current account maintenance charge is 0.20% for years 1-10, 0.15% for years 11-20 and 0.1% for years 21 and beyond. Current asset-based distribution charge is 0.3% for assets below $25 million, 0.2% for assets from $25 million to $50 million and 0.15% for $50 million and over.
Asset Location: Our estimates assume that the investor holds assets across multiple account types and structures, including both taxable and tax-deferred accounts, as well as (in the asset-location scenario) an investment-only variable annuity, with a time horizon of 20 years. We assume that the investor maintains an aggregate asset allocation of 60% equities and 40% fixed income in both scenarios, but the location of each underlying asset is varied across the baseline and asset location scenarios.
Our baseline scenario follows a pro-rata asset allocation for both account types. This asset allocation includes 15% investment grade fixed income, 20% municipal bonds, 5% high yield bonds, 30% passive equities, 25% active equities and 5% REITs. In the asset location scenario, each account’s allocations vary. The taxable account holds 40% municipal bonds and 60% passive equity; the tax-deferred account holds 30% investment grade fixed income, 10% high yield bonds, 50% active equities and 10% REITs.
Turnover rates generally follow 2024 GIC assumptions, though we assume a turnover of 10% for low-turnover equity managers and 100% for high-turnover equity managers.
During the asset accumulation period, investors stay in the 37% federal tax bracket, with a 5.2% state tax and a 3.8% Medicare surtax. At the end of the investment horizon, portfolio values are evaluated using their after tax-equivalent amount, assuming that the investors are in the 24% federal tax bracket and subject to a 5.2% state tax. Investment-only variable annuity fee is assumed to be 0.95% per year.
Intelligent Withdrawals and Income Smoothing: Our estimates for value-add assume that an investor holds a 60% equity, 40% fixed income portfolio across multiple account types, including taxable and tax-deferred accounts, as well as an investment-only variable annuity, and that the order and magnitude of withdrawals across these accounts is varied by the investor.
We allow for 20 years of asset growth in each scenario, with $1.5 million of assets distributed across accounts as in the “asset location” example described above. We do not model additional contributions during this accumulation period.
After these 20 years, withdrawals begin in order to provide retirement income. We calculate the annual withdrawal amount as equal to 4% of the aggregate portfolio’s pre-tax value at retirement, plus an annual adjustment for the cost of living (following inflation). We assume that withdrawals continue for 30 years. In the baseline scenario, we assume that withdrawals occur systematically, with withdrawals sized pro-rata from each account based on the assets held in each account. In the “intelligent withdrawal” scenario, we assume that withdrawals are taken from the taxable account first, then from the tax deferred retirement account and IOVA in pro-rata amounts, and from the Roth last.
The “income smoothing” scenario is designed to be similar to the intelligent withdrawal scenario, but in this case, we convert funds from the tax-deferred retirement account to a Roth account. The amount converted is determined such that, when combined with other sources of realized income each year, the upper threshold for the 12% tax bracket is reached.
During the wealth accumulation period of all scenarios, we assume that the investor remains in the 37% federal tax bracket and is subject to a 5.2% state tax and 3.8% Medicare surtax. During the subsequent retirement phase, we calculate the investor’s federal tax bracket based on the withdrawal amount (and account type), alongside a yearly Social Security payment—of $40,000 in the first year of retirement and adjusted for inflation afterward (Social Security subject to the 5.2% state tax and federal income tax).
Income tax brackets are based on the 2024 rates for a taxpayer that claims “married, filed jointly” status, and the tax brackets are assumed to grow with inflation.
Inflation rate is assumed to be 2.36% per year, per the GIC’s 2024 capital market assumptions. Portfolios are rebalanced each year within each account type, after the yearly spending amount is withdrawn.
Unrealized tax liabilities are subtracted from portfolio ending values to calculate IRR.
For the hypothetical investor case, we use Monte Carlo analysis to simulate, 10,000 capital market scenarios in order to estimate the value-add from using tax-efficient investing techniques. These simulations produce a range of investment outcomes which inform our estimates for each category of technique: enrolling in tax-advantaged accounts, leveraging tax efficient strategies for taxable assets and applying portfolio-level tax strategies. These exhibits show the median outcome of these simulations, assuming a holding period of 20 years.
In baseline scenario, we assume the investor has $10,000,000 in taxable assets and a target asset allocation of 20% investment grade fixed income, 30% passively managed equities, 20% actively managed equities and 30% alternatives (modeled as broad hedge funds). $1 million of the taxable assets to be invested is assumed to be a concentrated stock position that has significantly appreciated from cost basis and assumed to be 10% of its market value. We assume that the investor seeks to exit this concentrated position and diversify it into broad passively managed equity exposure. In this baseline scenario, we model a liquidation of this position, incurring capital gains taxes, in order to reallocate the remaining after-tax proceeds into passively managed equities.
The next sequential modeling step modifies the previous scenario to estimate the potential impact of using tax advantaged accounts. Here, we assume that the investor has accumulated $500,000 of their initial assets in a Roth account and $926,000 in a traditional retirement account (equivalent to $500,000 on an after-tax basis), with the remaining $9,000,000 in a taxable account. All three account types follow the same asset allocation as in the baseline scenario. Similarly, we assume that the $1,000,000 concentrated position in a single stock is liquidated at beginning of the simulation and invested in passively managed equities, realizing capital gains and paying the associated taxes at that point.
The next modeling step applies tax-efficient strategies to the $9,000,000 held in taxable accounts. Here, we assume that the investor replaces their taxable fixed income holdings with municipal bonds that are exempt from federal and state taxes as well as the Medicare surtax. We also assume that they deposit the concentrated $1,000,000 position in a single stock into an exchange fund, in return receiving proportional exposure to the exchange fund’s performance, which we model as 80% passively managed, broad US equity exposure and 20% private real estate exposure. The remaining $2,000,000 of exposure sought in passively managed equities is achieved using direct indexing vehicles for the first five years of the horizon, followed by a buy-and-hold strategy with minimum turnover after that. We also assume that the investor allocates $1,000,000 to an investment-only variable annuity (assuming a pro-rata underlying asset allocation); and for alternatives exposure, $3,000,000 to a private placement variable annuity. The fees for both vehicles are assumed to be the same as those used in the modeling described above. The underlying exposure of the PPVA is modeled to be 100% invested in alternatives (modeled as broad hedge fund exposure). All other accounts and the IOVA are assumed to have the same pro-rata allocation of 28.6% municipal bonds, 42.8% passive equities and 28.6% active equities.
Our final step models portfolio-level tax strategies, in this case “asset location” (intelligent withdrawals and income smoothing are not applicable to accumulation-focused strategies). To implement this technique, we modify the underlying holdings of the different account types such that the Roth account, traditional retirement account and IOVA each hold 100% of their funds in actively managed equities, while the taxable account is assumed to hold 40% of funds in municipal bonds and the remaining 60% in passively managed equities.
As in the previous exhibits, asset growth rates are based on the GIC’s 2024 capital market assumptions. We follow the strategic assumptions for the first seven years of the horizon and in the remaining years follow the secular assumptions. Turnover rates generally follow GIC 2024 assumptions, though we assume a turnover rate of 10% for low-turnover equity managers and 100% for high-turnover equity managers.
During the asset accumulation period of the simulations, we assume that the investor remains in the 37% federal tax bracket, with a 5.2% state tax and a 3.8% Medicare surtax. At the end of investment horizon, portfolio values are represented as their after-tax equivalent amounts, and we assume that the investor is in the 24% federal tax bracket, with a 5.2% state tax and 3.8% Medicare surtax.
Citations
Liberman, Joseph and Krasner, Stanley and Sosner, Nathan and Maia de Freitas, Pedro Paulo, Beyond Direct Indexing: Dynamic Direct Long-Short Investing (May 3, 2023). The Journal of Beta Investment Strategies, Direct Indexing Special Issue 2023, 14 (3): 10-41; DOI: 10.3905/jbis.2023.1.045, Available at SSRN: https://ssrn.com/abstract=4437402 or http://dx.doi.org/10.2139/ssrn.4437402
Important Disclosures
For index, indicator and survey definitions referenced in this report please visit the following: https://www.morganstanley.com/wealth-investmentsolutions/wmir-definitions
Risk Considerations
Monte Carlo Analysis Assumptions: As indicated above, this forward-looking analysis uses a Monte Carlo simulation to generate randomized, correlated returns that overall have similar characteristics to the Global Investment Committee’s 2024 strategic (seven-year capital markets assumptions. The Monte Carlo simulation involves sampling from those monthly returns for the constituent asset classes. From those monthly returns, we can compute hypothetical monthly returns for portfolios constructed with a lump-sum investing or dollar-cost averaging approach as of any month in the simulated returns data.
IMPORTANT: The projections or other information generated by this Monte Carlo simulation analysis regarding the likelihood of various investment outcomes do not reflect actual investment results and are not guarantees of future results. Results may vary with each use and over time.
Hypothetical Performance
General: Hypothetical performance should not be considered a guarantee of future performance or a guarantee of achieving overall financial objectives. Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.
Hypothetical performance results have inherent limitations. The performance shown here is simulated performance not investment results from an actual portfolio or actual trading. There can be large differences between hypothetical and actual performance results.
Despite the limitations of hypothetical performance, these hypothetical performance results may allow clients and Financial Advisors to obtain a sense of the risk / return trade-off of different asset allocation constructs.
Investing in the market entails the risk of market volatility. The value of all types of securities may increase or decrease over varying time periods.
This analysis does not purport to recommend or implement an investment strategy. Financial forecasts, rates of return, risk, inflation, and other assumptions may be used as the basis for illustrations in this analysis. They should not be considered a guarantee of future performance or a guarantee of achieving overall financial objectives. No analysis has the ability to accurately predict the future, eliminate risk or guarantee investment results. As investment returns, inflation, taxes, and other economic conditions vary from the assumptions used in this analysis, your actual results will vary (perhaps significantly) from those presented in this analysis.
The assumed return rates in this analysis are not reflective of any specific investment and do not include any fees or expenses that may be incurred by investing in specific products. The actual returns of a specific investment may be more or less than the returns used in this analysis. The return assumptions are based on hypothetical rates of return of securities indices, which serve as proxies for the asset classes. Moreover, different forecasts may choose different indices as a proxy for the same asset class, thus influencing the return of the asset class.
Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.
Investing in foreign markets entails risks not typically associated with domestic markets, such as currency fluctuations and controls, restrictions on foreign investments, less governmental supervision and regulation, and the potential for political instability. These risks may be magnified in countries with emerging markets and frontier markets, since these countries may have relatively unstable governments and less established markets and economies.
Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.
High yield bonds (bonds rated below investment grade) may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk, price volatility, and limited liquidity in the secondary market. High yield bonds should comprise only a limited portion of a balanced portfolio.
Interest on municipal bonds is generally exempt from federal income tax; however, some bonds may be subject to the alternative minimum tax (AMT). Also, municipal bonds acquired in the secondary market at a discount may be subject to the market discount tax provisions, and therefore could give rise to taxable income. Typically, state tax-exemption applies if securities are issued within one’s state of residence and, if applicable, local tax-exemption applies if securities are issued within one’s city of residence. The tax-exempt status of municipal securities may be changed by legislative process, which could affect their value and marketability.
Insurance does not pertain to market values which will fluctuate over the life of the bonds; it covers only the timely payment of interest and principal. Credit quality varies depending on the specific issuer and insurer.
Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision.
An investment in an exchange-traded fund involves risks similar to those of investing in a broadly based portfolio of equity securities traded on an exchange in the relevant securities market, such as market fluctuations caused by such factors as economic and political developments, changes in interest rates and perceived trends in stock and bond prices. Investing in an international ETF also involves certain risks and considerations not typically associated with investing in an ETF that invests in the securities of U.S. issues, such as political, currency, economic and market risks. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economics. ETFs investing in physical commodities and commodity or currency futures have special tax considerations. Physical commodities may be treated as collectibles subject to a maximum 28% long-term capital gains rates, while futures are marked-to-market and may be subject to a blended 60% long- and 40% short-term capital gains tax rate. Rolling futures positions may create taxable events. For specifics and a greater explanation of possible risks with ETFs¸ along with the ETF’s investment objectives, charges and expenses, please consult a copy of the ETF’s prospectus. Investing in sectors may be more volatile than diversifying across many industries. The investment return and principal value of ETF investments will fluctuate, so an investor’s ETF shares (Creation Units), if or when sold, may be worth more or less than the original cost. ETFs are redeemable only in Creation Unit size through an Authorized Participant and are not individually redeemable from an ETF.
Please consider the investment objectives, risks, charges and expenses of the fund(s) carefully before investing. The prospectus contains this and other information about the fund(s). To obtain a prospectus, contact your financial advisor. Please read the prospectus carefully before investing.
Alternative investments may be either traditional alternative investment vehicles, such as hedge funds, fund of hedge funds, private equity, private real estate and managed futures or, non-traditional products such as mutual funds and exchange-traded funds that also seek alternative-like exposure but have significant differences from traditional alternative investments. The risks of traditional alternative investments may include: can be highly illiquid, speculative and not appropriate for all investors, loss of all or a substantial portion of the investment due to leveraging, short-selling, or other speculative practices, volatility of returns, restrictions on transferring interests in a fund, potential lack of diversification and resulting higher risk due to concentration of trading authority when a single advisor is utilized, absence of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than open-end mutual funds, and risks associated with the operations, personnel and processes of the manager. Non-traditional alternative strategy products may employ various investment strategies and techniques for both hedging and more speculative purposes such as short-selling, leverage, derivatives and options, which can increase volatility and the risk of investment loss. These investments are subject to the risks normally associated with debt instruments and also carry substantial additional risks. Investors could lose all or a substantial amount of their investment. These investments typically have higher fees or expenses than traditional investments.
Hedge funds may involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager.
Environmental, Social and Governance (“ESG”) investments in a portfolio may experience performance that is lower or higher than a portfolio not employing such practices. Portfolios with ESG restrictions and strategies as well as ESG investments may not be able to take advantage of the same opportunities or market trends as portfolios where ESG criteria is not applied. There are inconsistent ESG definitions and criteria within the industry, as well as multiple ESG ratings providers that provide ESG ratings of the same subject companies and/or securities that vary among the providers. Certain issuers of investments may have differing and inconsistent views concerning ESG criteria where the ESG claims made in offering documents or other literature may overstate ESG impact. ESG designations are as of the date of this material, and no assurance is provided that the underlying assets have maintained or will maintain and such designation or any stated ESG compliance. As a result, it is difficult to compare ESG investment products or to evaluate an ESG investment product in comparison to one that does not focus on ESG. Investors should also independently consider whether the ESG investment product meets their own ESG objectives or criteria. There is no assurance that an ESG investing strategy or techniques employed will be successful. Past performance is not a guarantee or a dependable measure of future results.
Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.
Nondiversification: For a portfolio that holds a concentrated or limited number of securities, a decline in the value of these investments would cause the portfolio’s overall value to decline to a greater degree than a less concentrated portfolio. Portfolios that invest a large percentage of assets in only one industry sector (or in only a few sectors) are more vulnerable to price fluctuation than those that diversify among a broad range of sectors.
IRS rules stipulate that if a security is sold by an investor at a tax loss, the tax loss will not be currently usable if the investor has acquired (or has entered into a contract or option on) the same or substantially identical securities 30 days before or after the sale that generated the loss. This so-called “wash sale” rule is applied with respect to all of the investor’s transactions across all accounts.
Value investing does not guarantee a profit or eliminate risk. Not all companies whose stocks are considered to be value stocks are able to turn their business around or successfully employ corrective strategies which would result in stock prices that do not rise as initially expected.
Growth investing does not guarantee a profit or eliminate risk. The stocks of these companies can have relatively high valuations. Because of these high valuations, an investment in a growth stock can be more risky than an investment in a company with more modest growth expectations.
Annuities
Annuities are long term tax-deferred retirement savings vehicles. Annuities are generally subject to surrender charges. A surrender charge is a penalty you have to pay if you sell or withdraw money from an annuity before it matures. The time before an annuity’s maturity is called the surrender period and usually lasts for several years after purchase. Surrender charges reduce the value of your annuity and its returns. Early withdrawals will reduce the death benefit and cash surrender value.
Under current law, a nonqualified annuity that is owned by an individual is generally entitled to tax deferral. IRAs and qualified plans—such as 401(k)s and 403(b)s—are already tax-deferred. Therefore, a deferred annuity should be used only to fund an IRA or qualified plan to benefit from the annuity’s features other than tax deferral. These include lifetime income and death benefit options.
Variable Annuities
Variable annuities are sold by prospectus only. The prospectus contains the investment objectives, risks, fees, charges and expenses, and other information regarding the variable annuity contract and the underlying investments, which should be considered carefully before investing. Prospectuses for both the variable annuity contract and the underlying investments are available from your Financial Advisor. Please read the prospectus carefully before you invest.
Variable annuities are long-term investments designed for retirement purposes and may be subject to market fluctuations, investment risk, and possible loss of principal. All guarantees, including optional benefits, are based on the financial strength and claims-paying ability of the issuing insurance company and do not apply to the underlying investment options.
Optional riders may not be able to be purchased in combination and are available at an additional cost. Some optional riders must be elected at time of purchase. Optional riders may be subject to specific limitations, restrictions, holding periods, costs, and expenses as specified by the insurance company in the annuity contract.
If you are investing in a variable annuity through a tax-advantaged retirement plan such as an IRA, you will get no additional tax advantage from the variable annuity. Under these circumstances, you should only consider buying a variable annuity because of its other features, such as lifetime income payments and death benefits protection.
Taxable distributions (and certain deemed distributions) are subject to ordinary income tax and, if taken prior to age 59 ½, may be subject to a 10% federal income tax penalty. Early withdrawals will reduce the death benefit and cash surrender value.
Morgan Stanley Smith Barney LLC offers insurance products in conjunction with its licensed insurance agency affiliates.
529 Plans
Some plans may have age, residency or other restrictions and may charge a fee for beneficiary changes.
If an account owner or the beneficiary resides in or pays income taxes to a state that offers its own 529 college savings or pre-paid tuition plan (an “In-State Plan”), that state may offer state or local tax benefits. These tax benefits may include deductible contributions, deferral of taxes on earnings and/or tax-free withdrawals. In addition, some states waive or discount fees or offer other benefits for state residents or taxpayers who participate in the In-State Plan. An account owner may be denied any or all state or local tax benefits or expense reductions by investing in another state’s plan (an “Out-of-State Plan”). In addition, an account owner’s state or locality may seek to recover the value of tax benefits (by assessing income or penalty taxes) should an account owner rollover or transfer assets from an In-State Plan to an Out-of-State Plan. While state and local tax consequences and plan expenses are not the only factors to consider when investing in a 529 Plan, they are important to an account owner’s investment return and should be taken into account when selecting a 529 plan.
Tax laws are complex and are subject to change. This information is based upon current tax rules in effect at the time this was written. Morgan Stanley Smith Barney LLC and its Financial Advisors do not provide tax or legal advice. Individuals should always check with their tax or legal advisor before engaging in any transaction involving 529 Plans, Education Savings Accounts and other tax-advantaged investments.
Investments in a 529 Plan are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so an individual may lose money. Investors should review a Program Disclosure Statement, which contains more information on investment options, risks factors, fees and expenses and possible tax consequences. Investors should read the Program Disclosure Statement carefully before investing.
Derivative instruments. Options, futures contracts, options on futures contracts, forward contracts, swaps and structured products are examples of derivative instruments. Risks of derivative instruments include imperfect correlation between the value of the instruments and the underlying assets; risks of default by the other party to certain transactions; risks that the transactions may result in losses that partially or completely offset gains in portfolio positions; and risks that the transactions may not be liquid. Please see the fund’s prospectus for additional information.
The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. The indices are not subject to expenses or fees and are often comprised of securities and other investment instruments the liquidity of which is not restricted. A particular investment product may consist of securities significantly different than those in any index referred to herein. Comparing an investment to a particular index may be of limited use.
The indices selected by Morgan Stanley Wealth Management to measure performance are representative of broad asset classes. Morgan Stanley Wealth Management retains the right to change representative indices at any time.
Performance of indices may be more or less volatile than any investment product. The risk of loss in value of a specific investment (such as with an investment manager or in a fund) is not the same as the risk of loss in a broad market index. Therefore, the historical returns of an index will not be the same as the historical returns of a particular investment product.
Disclosures
Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States.This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Past performance is not necessarily a guide to future performance.
The author(s) (if any authors are noted) principally responsible for the preparation of this material receive compensation based upon various factors, including quality and accuracy of their work, firm revenues (including trading and capital markets revenues), client feedback and competitive factors. Morgan Stanley Wealth Management is involved in many businesses that may relate to companies, securities or instruments mentioned in this material.
This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security/instrument, or to participate in any trading strategy. Any such offer would be made only after a prospective investor had completed its own independent investigation of the securities, instruments or transactions, and received all information it required to make its own investment decision, including, where applicable, a review of any offering circular or memorandum describing such security or instrument. That information would contain material information not contained herein and to which prospective participants are referred. This material is based on public information as of the specified date, and may be stale thereafter. We have no obligation to tell you when information herein may change. We make no representation or warranty with respect to the accuracy or completeness of this material. Morgan Stanley Wealth Management has no obligation to provide updated information on the securities/instruments mentioned herein.
Portions of the report may have been generated with the assistance of artificial intelligence (AI).
The securities/instruments discussed in this material may not be appropriate for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Morgan Stanley Wealth Management recommends that investors independently evaluate specific investments and strategies, and encourages investors to seek the advice of a financial advisor. The value of and income from investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies and other issuers or other factors. Estimates of future performance are based on assumptions that may not be realized. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Morgan Stanley Wealth Management does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein.
This material should not be viewed as advice or recommendations with respect to asset allocation or any particular investment. This information is not intended to, and should not, form a primary basis for any investment decisions that you may make. Morgan Stanley Wealth Management is not acting as a fiduciary under either the Employee Retirement Income Security Act of 1974, as amended or under section 4975 of the Internal Revenue Code of 1986 as amended in providing this material except as otherwise provided in writing by Morgan Stanley and/or as described at www.morganstanley.com/disclosures/dol.
Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors do not provide legal or tax advice. Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation and to learn about any potential tax or other implications that may result from acting on a particular recommendation.
This material is disseminated in Australia to “retail clients” within the meaning of the Australian Corporations Act by Morgan Stanley Wealth Management Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813).
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