SpaceX, Anthropic, and the Danger of IPO Euphoria

The SpaceX (symbol: SPCX) initial public offering (IPO) arrived on Friday with historic scale and an equally historic level of enthusiasm. Within hours of listing, the company approached a $2 trillion valuation, placing it among the world's largest companies almost instantly.

The stock was priced at $135 and closed its first day of trading near $161, a respectable one-day gain of over 19%. By most measures, the launch was a success.

There’s no question that SpaceX is a remarkable business. The combination of Starlink’s recurring revenue, reusable rocket technology, and its expanding ambitions in artificial intelligence and orbital infrastructure makes it one of the most ambitious enterprises ever brought to public markets.

But investors need to separate two things that often get conflated during moments like this: a great company and a great investment at today’s price.

At over 100x sales, the current valuation embeds not just success, but near-perfection.

What You’re Really Buying

Form S-1 is the basic SEC “go public” document that a company must file before an IPO, laying out its business, finances, risks, and how it plans to use the money raised so investors can decide whether to buy the stock.

A closer look at the SpaceX Form S-1 tells a nuanced story. SpaceX today is effectively three businesses layered together:

• A strong core: Starlink, generating high-margin, recurring revenue

• A proven enabler: reusable rockets lowering the cost of space access

• A set of long-dated bets: Artificial Intelligence, orbital data centers, and space commercialization

A reasonable sum-of-the-parts framework might justify a valuation closer to $1–$1.1 trillion, even after applying a generous premium for Elon Musk’s track record. The gap between that and the IPO valuation represents something very important: a priced-in call option on the future of space itself.

Roughly 30–40% of the valuation is tied not to current earnings power, but to outcomes that may take a decade or longer to materialize, if they materialize at all.

That is not speculation in a negative sense, but it is speculation nonetheless.

The IPO Reality: Liquidity Event First

Only about 4% of shares were floated (offered) in the IPO. The rest remain with insiders, employees, and early investors, many of whom are sitting on enormous gains.

This matters.

The IPO is not primarily about funding rockets. It is, in large part, a liquidity event that allows early stakeholders to sell into peak demand. Public investors are stepping in at a point where much of the value creation has already occurred in private markets.

History shows this is rarely where the best risk/reward entry point exists.

Mega-IPOs and Market History

The pattern is consistent:

• The largest, most anticipated IPOs tend to debut at elevated valuations

• Early trading is driven by constrained supply and heavy demand

• Over time, as stock lock-ups expire and supply increases, prices often normalize

Recent IPO examples reinforce this:

• Rivian: down ~80% from early highs

• Coupang: down more than 50%

• Lineage Logistics: Down about 50% within two years

• Several recent large IPOs are still below listing prices

Even the “winners” like Airbnb and Snowflake have delivered flat-to-negative returns for investors who bought on day one.

In fact, the majority of recent mega-IPOs have traded below their initial listing price within a year.

Even successful long-term companies often struggle after going public. Tesla, for example, went essentially nowhere for years after its IPO before eventually delivering outsized returns. Facebook also traded below its offering price for an extended period before recovering.

This does not mean SpaceX will fail. It means that the entry price matters.

The key takeaway: timing and valuation matter just as much as the quality of the business.

The Supply-Demand Illusion

Early trading in IPOs can be misleading.

With such a small percentage of shares available, supply is artificially constrained. At the same time, demand is amplified by media coverage, retail enthusiasm, and, in some cases, forced buying from index funds. Underwriters have a vested interest in a successful IPO, so they’ll support the stock price by buying shares for the first few days after the IPO.

This imbalance can push prices higher in the short term, but it is not sustainable. As lock-up periods expire and more shares become available, supply increases significantly, often putting downward pressure on prices.

Tesla, SpaceX, and the Merger Question

One of the most discussed topics right now is a potential merger between Tesla and SpaceX.

Based on the Form S-1, there is no indication that such discussions have occurred at the board level. From a legal and disclosure standpoint, that strongly suggests any transaction, if it were ever considered, is likely years away, not imminent.

That said, the relationship between the companies is real and growing:

• Tesla supplied over $500 million in energy infrastructure to SpaceX’s AI operations

• Joint initiatives include chip development and AI-driven systems

• Tesla has already taken a stake in SpaceX

These are meaningful commercial ties, but they do not equate to a pending merger. For now, think strategic partnership, not consolidation.

Index Inclusion: A Hidden Driver

Another overlooked dynamic is how quickly SpaceX could be added to major indexes.

Nasdaq’s new “fast entry” rules could force inclusion into the Nasdaq-100 within weeks, potentially driving billions in passive buying. At the same time, S&P maintains stricter profitability and seasoning requirements, which could delay inclusion there.

This creates a new dynamic:

• Short-term demand driven by index flows

• Long-term uncertainty around sustained institutional ownership

It also raises a broader issue: index rules themselves are evolving in response to companies like SpaceX, Anthropic, and OpenAI.

Despite its size, SpaceX is not immediately eligible for inclusion in the S&P 500 index due to profitability and trading history requirements. While some indexes may add it quickly, others will not. That distinction matters, as index inclusion can drive substantial institutional demand.

Investors should not assume automatic or immediate support from passive investment flows.

Sector Classification Matters More Than You Think

The S&P 500 is divided into eleven sectors, each with different “weights” in the index. Where SpaceX ultimately lands, Communication Services, Industrials, or even a revised sector structure, will influence how capital flows into the stock.

• The Communication Services sector is the most likely home, driven by Starlink

• The Industrials sector reflects legacy aerospace perception

• The Technology sector is possible, but would further concentrate an already dominant sector

This is not just academic. Sector placement affects ETF and mutual fund flows, institutional allocations, and ultimately valuation support.

A Broader Message for Upcoming IPOs (Including Anthropic and Open AI)

What we are seeing with SpaceX is not an isolated event. It is part of a broader trend:

• Larger companies are staying private longer

• Public investors are gaining access later in the lifecycle

• Valuations reflecting peak optimism at the point of entry

We are seeing similar enthusiasm building around other potential IPOs, including companies like Anthropic and OpenAI. Anthropic, OpenAI, and other AI-driven IPOs are likely to follow a pattern similar to SpaceX's.

This is a recurring cycle in the markets. Investors become eager to “get in early” on transformative companies, fearing they may miss the next Amazon or Google. But by the time a company reaches the public markets today, much of the explosive growth has already occurred in private hands.

The public market often receives a more mature company, at a valuation that already reflects high expectations.

The risk is not that these companies are poor businesses. The risk is overpaying at the moment of maximum narrative strength.

A More Disciplined Approach

None of this suggests avoiding these companies altogether. SpaceX may very well be a dominant force for decades. The same could be true for leading AI firms.

However, discipline is critical:

• Avoid chasing first or second day excitement

• Let valuations normalize over time

• Watch how the stock behaves after lock-up periods lapse

• Focus on risk-adjusted entry points rather than headlines

There is often a far greater opportunity after the initial hype fades and price discovery becomes more grounded.

Final Thought: Patience Over Participation

The most important question is not whether SpaceX succeeds. It very well may.

The question is whether buying into the initial excitement offers a favorable risk/reward tradeoff.

History suggests that it rarely does.

There will likely be a time when SpaceX, or companies like Anthropic, offer compelling entry points. Those opportunities tend to emerge after the hype fades, after supply increases, and after valuations are tested by reality.

Until then, discipline matters more than enthusiasm.

Although the fear of missing out is a powerful motivator, there is another saying in the investing and trading business:

It’s better to be out of a stock and wishing you were in, than being in a stock wishing you were out.

Sam H. Fawaz CFP®, CPA, PFS is the President of YDream Financial Services, Inc., a fee-only investment advisory and financial planning firm serving the entire United States. If you would like to review your current investment portfolio or discuss any other retirement, college, tax, or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fiduciary financial planning firm that always puts your interests first, with no products to sell. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We begin with a thorough assessment of your unique personal situation. There is no rush and no cookie-cutter approach. Each client’s financial plan and investment objectives are unique.

What's Going on in the Markets May 31, 2026

It’s the end of May, and stock markets continue to demonstrate remarkable strength. The S&P 500 and Nasdaq indexes both reached record highs on the last trading day of the month (Friday), capping off a powerful May in which major indices gained between 2.5% and 11%. Notably, only Bitcoin and gold declined during the month, and year-to-date, Bitcoin remains the only major asset class down double digits, while bonds are modestly negative.

Since the March 30 intraday low, the S&P 500 index has rallied approximately 20%, marking the strongest nine-week winning streak on record. While last week’s gains were relatively modest, they were sufficient to extend this historic run.

A Rare and Powerful Rally

This type of sustained advance is uncommon. Since 1950, there have only been 10 similar streaks, and just two in this century. Historically, these periods are often followed by short-term consolidation (sideways movement), typically driven more by marking time and sector rotation than by sharp price declines.

More importantly, forward returns following these streaks, over periods ranging from one month to one year, have generally been positive. These types of environments have not typically marked major market tops or the beginning of bear (downtrending) markets.

That said, it is reasonable to expect a near-term pause, pullback, or correction. After such an extended run, some degree of consolidation would be healthy. This should not be confused with an imminent bear market; longer-term conditions still support higher equity prices, and I expect the indexes will be higher by year’s end.

Liquidity, Artificial Intelligence, and Expanding Opportunity

Several structural forces continue to underpin the market:

• Artificial intelligence remains a dominant investment theme, driving capital spending, earnings growth, and investor enthusiasm.

• A wave of high-profile IPOs, including SpaceX and Anthropic, has the potential to attract new capital to public markets.

• Corporate earnings have broadly exceeded expectations, reinforcing confidence in equity valuations.

At the same time, speculative behavior has re-emerged. Recent trading activity suggests increased risk-taking, with rapid money rotations between stocks and heightened momentum-driven flows. This reflects abundant liquidity but also introduces fragility if sentiment shifts.

The Macroeconomic Backdrop: Mixed Signals

While markets are strong, economic data presents a more nuanced picture:

• New home sales declined 6.2% month-over-month, with inventory rising to a 9.4-month supply, well above the 4–6-month range considered balanced. Affordability remains a key constraint.

• Consumer confidence edged lower, with households increasingly reducing discretionary spending and delaying large purchases.

• Inflation, as measured by the PCE Index (Personal Consumption Expenditures), is re-accelerating. Headline PCE rose to 3.8% year-over-year, while core PCE (which measures the prices U.S. consumers pay for goods and services excluding food and energy) increased to 3.3%, both well above the Federal Reserve’s 2% target.

Consumer sentiment just hit an all-time low of 44.8 in May, with current conditions and future expectations both collapsing to record pessimism.

This is the first time since 1953 that all three (overall, current, and future) sentiment measures have simultaneously set new lows, making today’s mood historically bad. Consumers feel worse about both their present situation and their outlook than at any point in roughly 75 years of data. They’re especially worried about long-run inflation, the rising cost of living, and deteriorating personal finances. If these attitudes lead households to cut back on spending, it could weigh meaningfully on the U.S. economy and, eventually, on stock prices.

These divergences highlight an important principle: the economy and the stock market often move on different timelines. While portions of the economy, particularly lower- and middle-income consumers, are under pressure, corporate earnings and investment, especially in artificial intelligence, remain robust.

The Federal Reserve: No Immediate Safety Net

Markets have, at times, relied on the assumption of a “Federal Reserve Put”, the idea that policymakers will step in to support asset prices during periods of weakness. That assumption is less reliable today.

With inflation still elevated and the labor market relatively stable, the Federal Reserve has limited flexibility to cut rates aggressively. Any expectation of rapid easing may be premature. As a result, markets could be vulnerable to disappointment if policy remains tighter for longer. A small rate hike in the next 12 months would not be surprising if inflation remains sticky.

The new Federal Reserve Chairman, Kevin Warsh, has his work cut out for him.

Oil, Geopolitics, and Expectations

Recent declines in oil prices have supported stocks by easing inflation concerns and lowering yields. Much of this optimism is tied to expectations of a potential U.S.–Iran agreement and increased global energy supplies.

However, markets may have already priced in much of this positive outcome. If oil prices stabilize or decline less than expected, or if geopolitical developments take longer to materialize, equities could face a “sell-the-news” reaction.

The Week Ahead: A Critical Test

The coming week is dense with catalysts and could set the tone for the market's next phase.

1. May 2026 Monthly Jobs Report (Friday June 5)

Economists expect approximately 90,000 new jobs, with an unemployment rate near 4.3%. Markets are looking for a “Goldilocks” outcome-a strong enough to confirm economic stability, but not so strong that it reignites inflation concerns or pushes interest rates higher.

2. AI Conferences and Commentary

Events such as Computex Taipei, Microsoft Build, and the Snowflake Summit will keep AI at the forefront. Investors will be watching for signs that demand is broadening beyond semiconductors into software, infrastructure, and enterprise applications.

3. Federal Reserve Signals

Federal Reserve speakers and the Beige Book will provide insight into inflation, labor markets, and regional economic conditions. Any shift toward a more hawkish tone could challenge current market optimism.

4. Key Earnings Reports

Companies reporting earnings this week include Broadcom, CrowdStrike, Hewlett Packard Enterprises, Medtronic, Palo Alto Networks, and several major retailers (see below). These results will help determine whether earnings strength is broad-based or still concentrated in a narrow group of leaders.

5. Consumer Health Indicators

Retail earnings and updates, including from Dollar General, Ollie’s, Signet Jewelers, Victoria’s Secret, Macy’s, Ulta Beauty, Five Below, and Lululemon, will offer a clearer picture of consumer behavior. Spending remains intact but increasingly selective.

What Matters Most Now

The market remains in a bullish uptrend, supported by earnings growth, AI-driven investment, and resilient economic activity. However, conditions are becoming more balanced:

• Valuations are higher.

• Expectations are elevated.

• Positioning is more crowded, particularly in technology and AI-related names.

For the rally to continue, incoming data must validate current optimism. That means stable employment, contained interest rates, and continued strength in earnings and AI demand.

Bottom Line

The primary question is no longer whether the market is strong—it clearly is. The more important question is whether it can sustain that strength amid a heavy calendar of economic data, policy signals, and corporate results.

If markets continue to absorb news constructively, maintain leadership, and attract buyers on pullbacks, the path higher remains intact. However, if positive developments trigger selling, or if interest rates rise, it would signal a transition from momentum-driven gains to a period of consolidation.

Investors should be prepared for near-term volatility while recognizing that the broader trend remains quite constructive.

Sam H. Fawaz CFP®, CPA, PFS is the President of YDream Financial Services, Inc., a fee-only investment advisory and financial planning firm serving the entire United States. If you would like to review your current investment portfolio or discuss any other retirement, college, tax, or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fiduciary financial planning firm that always puts your interests first, with no products to sell. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We begin with a thorough assessment of your unique personal situation. There is no rush and no cookie-cutter approach. Each client’s financial plan and investment objectives are unique.

Why You Shouldn’t Trust the Postmark Anymore

Starting December 24, 2025, the U.S. Postal Service (USPS) quietly changed how postmarks are applied, and it could mean the difference between an on‑time filing and a late-penalty charge.

Here’s the big change:
A postmark now reflects when your mail is first processed at a USPS facility, not when you dropped it off.

That might sound small, but for tax filings, it could be huge.

The problem: the IRS only looks at the postmark date

Under the IRS’s “mailbox rule,” a document is treated as filed on the postmark date. Historically, you could drop something off at the post office on April 15, get a same‑day postmark, and you were safe.

Now, that’s no longer guaranteed.

In this new system, if your envelope sits in a corner or local box for a day or two before it’s processed, it might get a postmark dated after the tax deadline. And that could trigger penalties, interest, or even missed tax elections, all because of a processing delay you can’t see.

Who should pay attention?

• Paper filers: Anyone still mailing returns or elections instead of e‑filing.

• Tax pros and preparers: Especially those mailing extensions, elections, or payment vouchers for clients.

• Businesses: Certain forms, elections, or claims still require physical mailing.

How to protect yourself

The safest move? Go digital whenever possible. But if you must mail something close to a deadline, here’s what to do:

• Avoid collection boxes near filing deadlines. They might not get processed for a day or more.

• Skip self‑service or metered labels: They don’t count as official postmarks.

• Mail from a retail USPS counter and watch it get stamp‑dated before your eyes.

• Request proof of mailing, such as:

  • A postage validation imprint (PVI) from the retail counter

  • A manual hand‑stamped postmark

  • Registered or certified mail service

For those who prefer the official text, you can read the USPS guidance here, but the takeaway is simple: don’t wait until the last minute to mail tax documents. The “postmark rule” isn’t as forgiving as it used to be.

Sam H. Fawaz CFP®, CPA, PFS is the President of YDream Financial Services, Inc., a fee-only investment advisory and financial planning firm serving the entire United States. If you would like to review your current investment portfolio or discuss any other retirement, college, tax, or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fiduciary financial planning firm that always puts your interests first, with no products to sell. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We begin with a thorough assessment of your unique personal situation. There is no rush and no cookie-cutter approach. Each client’s financial plan and investment objectives are unique.

No Paper, Only Plastic or Digital: Welcome to Tax Filing Season 2026

I can’t believe it’s here again—the hustle and bustle of the 2025 tax filing season.

Didn’t we just finish filing 2024 returns and 2025 tax planning?

What’s new

The One Big Beautiful Bill Act, signed into law in July 2025, made several changes taxpayers may want to be aware of when preparing their returns, including these:

· New deductions for tip income and overtime pay are available: up to $25,000 for qualified tips and up to $12,500 ($25,000 if married filing jointly) for overtime, both with income limits.

· A new $6,000 senior deduction is available for taxpayers 65 and older ($12,000 if both taxpayers are 65 and older and married filing jointly), with income limits.

· The Child Tax Credit has been increased to $2,200 per qualifying child.

· The State and Local Tax deduction cap increased to $40,000 for most filers, though this benefit begins to phase out for individuals with a modified adjusted gross income (MAGI) over $500,000.

· New deduction for interest on loans for qualifying new vehicles with final assembly in the U.S., for purchases made in 2025–2028.

· Starting in 2026, a new above‑the‑line charitable deduction up to $2,000 for cash gifts to qualifying charities, available even if you don’t itemize, subject to income limits.

Tips to make filing easier

To speed a potential tax refund and help with tax filing, the IRS suggests the following:

· Make sure you have received Form W-2 and other earnings information, such as Forms 1099, from employers and payers before heading to your favorite tax preparer or starting self-preparation.

The dates for furnishing such information to recipients vary by form, but they are generally not required before February 1, 2026. You may need to allow additional time for mail delivery.

Some brokerage 1099s may not be available until sometime in March, and Schedule K-1s for partnership, S corporation, and trust beneficiaries may be furnished close to or after the deadline (which may require an extension to file).

· Go to irs.gov to find Form 1040 or Form 1040-SR (available for seniors born before January 2, 1960), and their instructions.

· File electronically and use direct deposit or direct debit.

· Request an extension of time to file rather than rush through preparation. An extension of time to file does not extend the time to pay, so you must estimate your liability and send it in with your extension.

· Consider whether the cost of professional tax preparation, in light of many new and confusing tax provisions, is in your best interest. Professional tax preparation is recommended for anything but the simplest returns and often pays for itself in mistakes avoided, time, and tax savings, and frustration.

· Check irs.gov for the latest tax information.

Key filing dates

Here are several important dates to keep in mind:

· January 9. IRS Free File opened. IRS Free File Guided Tax Software, available only at irs.gov/freefile, allows participating software companies to accept completed 2025 tax returns from any taxpayer or family with an adjusted gross income (AGI) of $89,000 or less and electronically file the returns with the IRS.

On January 26, Free File Fillable Forms became available to taxpayers with an AGI above $89,000 to fill out and e-file themselves at no cost.

· January 26. The IRS began accepting and processing individual tax returns.

· April 15. The deadline to file 2025 federal income tax returns (or request an extension) arrives for most taxpayers. If you’re required to make quarterly estimated income tax payments, your 1st quarter 2026 estimated payment is also due (some state tax payment due dates vary slightly from federal due dates).

· June 15 and September 15. These are the due dates for the 2nd- and 3rd-quarter 2026 federal estimated income tax payments. These payments are due even if your 2025 tax return is on extension and has not yet been filed.

· October 15. This is the federal filing deadline for those who requested an extension on their 2025 tax returns.

January 15, 2027. This is the due date for the 4th quarter 2026 federal estimated income tax payment.

Tax refunds

The IRS encourages taxpayers seeking a tax refund to file their tax return as soon as possible. The IRS expects to issue most tax refunds within 21 days of receiving a tax return. That’s true only if:

(1) the return is filed electronically,
(2) the tax refund is delivered via direct deposit and,
(3) there are no issues with the tax return.

To minimize processing delays, the IRS encourages people to avoid paper tax returns whenever possible.

Paper Tax Refund Checks Being Phased Out by the IRS

As part of a broader U.S. Department of the Treasury initiative to transition to fully electronic federal payments, the IRS is phasing out paper tax refund checks for individual taxpayers beginning with the 2026 federal tax filing season and is also reducing reliance on paper checks paid to the IRS in favor of electronic payment options.

Why is the IRS making this change?

The move towards electronic payments is designed to protect taxpayers from the possibility of a paper refund check being lost, stolen, altered, delayed, or returned to the IRS as undeliverable. Electronic refunds (and payments) are also more cost-efficient and faster than non-electronic payments, which can take six weeks or longer to process.

What does this mean for taxpayers?

No changes are being made to the process of filing a tax return. Taxpayers should continue to file their tax returns as they normally would, using one of the existing filing options. However, the shift in refund delivery will be towards electronic payment methods. As a result, taxpayers should have all of their banking information (e.g., account and routing numbers) readily available when filing their returns.

While most tax refunds will be delivered by direct deposit or other secure electronic methods, alternative options, such as prepaid debit cards or digital wallets, will still be available for taxpayers without a bank account.

So plastic? Yes. Paper? No.

What if I owe the IRS money?

The IRS has stated that taxpayers should continue to use existing payment options until further notice, but is strongly encouraging individuals and businesses to use electronic payment options, since they are easier, faster, and more secure. Further IRS guidance is expected soon.

The IRS offers the following electronic payment options:

• IRS Direct Pay, which lets you pay the IRS directly from your bank account without fees

• Electronic Federal Tax Payment System (EFTPS), a free system offered by the U.S. Department of the Treasury to pay your federal taxes (only if you’re already enrolled; new enrollments were suspended as of October 17, 2025)

• IRS2Go, an IRS mobile app that allows you to make secure mobile payments using Direct Pay or card-based options

• Debit card, credit card, or digital wallet payments made through IRS‑approved third‑party processors (convenience fees may apply)

For more information on the IRS transition towards electronic payments, visit modernizing payments.

After all that, the bottom line is simple: in a world where the IRS is going plastic, Congress is handing out “One Big Beautiful” goodies, and paper checks are going the way of carbon paper, the smartest move you can make this filing season is to stay organized, think electronic, and, when in doubt, let a tax pro lose sleep so you don’t have to.

Sam H. Fawaz CFP®, CPA, PFS is the President of YDream Financial Services, Inc., a fee-only investment advisory and financial planning firm serving the entire United States. If you would like to review your current investment portfolio or discuss any other retirement, college, tax, or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fiduciary financial planning firm that always puts your interests first, with no products to sell. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We begin with a thorough assessment of your unique personal situation. There is no rush and no cookie-cutter approach. Each client’s financial plan and investment objectives are unique.

Mandatory Roth Catch-Up Contributions Begin in 2026

For nearly a quarter century, employers have offered their retirement savings plan participants age 50 and older a valuable opportunity: the chance to make additional catch-up contributions to their plans.¹

Thanks to the SECURE 2.0 Act passed in 2022, that opportunity became even more valuable: Employers may now allow plan participants aged 60 to 63 to contribute more than their other catch-up-eligible peers through “super catch-ups.”

In 2025, the standard plan contribution limit was $23,500. Participants ages 50 to 59 and 64 and older in 2025 can contribute an additional $7,500, while those ages 60 to 63 can contribute an additional $11,250.

However, SECURE 2.0 also included a provision requiring catch-up contributions to be made on a Roth basis for certain high-earning employees. In September 2025, the IRS issued final regulations on these mandatory Roth catch-ups, which will take effect this year.

The Big Picture

In most work-based savings plans, employees can make catch-up contributions and contribute on both a pre-tax and a Roth after-tax basis.² While pre-tax contributions reduce the proportion of a participant’s paycheck that is subject to current income taxes, Roth contributions allow participants to potentially build a tax-free nest egg for the future. Withdrawals from Roth accounts made after the account owner reaches age 59½ are tax-free, provided the account has been held for at least five years; other exceptions apply.

Pre-tax contributions can be especially appealing to high earners, who may contribute as much as possible (up to plan limits) to maximize the opportunity to reduce current taxable income.

However, pre-tax contributions also reduce federal tax revenue. That may be why legislators included a provision in SECURE 2.0 requiring catch-up contributions for those earning more than $145,000 to be made on a Roth (post-tax), rather than a pre-tax basis. Initially slated to take effect in 2024, that provision was delayed until 2026 to allow the IRS to finalize rules and employers to modify their systems and plan documentation accordingly.³

The Details

In September 2025, the IRS issued final regulations stating that the new requirements generally apply to contributions in taxable years beginning after December 31, 2026. The IRS further stated, “The final regulations also permit plans to implement the Roth catch-up requirement for taxable years beginning before 2027 using a reasonable, good faith interpretation of statutory provisions.”⁴ Many industry observers interpret this language to mean that employers will be expected to begin implementing the new provisions in 2026.⁵ ⁷

To determine whether an employee exceeds the $145,000 threshold, employers will use Federal Insurance Contributions Act (FICA) wages listed in box 3 of the employee’s W-2 form from the previous year. In other words, to comply in 2026, employers will use 2025 W-2 forms. The rule does not apply to those who do not have prior-year W-2 wages, such as the self-employed.⁶ ⁸

The new rule applies to standard and super catch-ups in 401(k), 403(b), and 457(b) plans; however, the new Roth mandate does not apply to SIMPLE plans or the special catch-up contributions permitted in 403(b) and 457(b) plans. Plans that do not offer Roth contributions must either add a Roth feature or disallow high earners from making catch-up contributions.⁷ ⁹ ¹¹

Tax and Retirement-Savings Impacts

High earners who may be subject to the new rule might want to review their tax-planning and retirement-savings strategies soon. Although Roth contributions can provide substantial tax benefits in the future, eliminating the pre-tax catch-up contribution could have a surprising impact on income tax planning during the 2026 tax-filing season.

Sam H. Fawaz CFP®, CPA, PFS is the President of YDream Financial Services, Inc., a fee-only investment advisory and financial planning firm serving the entire United States. If you would like to review your current investment portfolio or discuss any other retirement, college, tax, or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fiduciary financial planning firm that always puts your interests first, with no products to sell. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We begin with a thorough assessment of your unique personal situation. There is no rush and no cookie-cutter approach. Each client’s financial plan and investment objectives are unique.

1) CNBC, January 4, 2017
2) PLANADVISER, October 1, 2025
3) IRS Notice 2023-62
4) IRS, September 15, 2025
5) Society for Human Resource Management, accessed October 2, 2025
6, 8) Plan Sponsor Council of America, September 30, 2025
7, 9, 10) Slott Report, September 22, 2025
11) ADP SPARK blog, accessed October 2, 2025