New Catch-up Rule Could Upend Tax Planning for Some

The IRS issued final regulations on Sept. 15, 2025 implementing SECURE 2.0 changes that generally apply to contributions in taxable years beginning after Dec. 31, 2026, and require catch-up contributions to be Roth for individuals whose prior-year FICA wages exceed the $150,000 threshold (2025 wages for 2026 investments). The rules — following a two-year Treasury transition — reduce the pre-tax deferral benefit for many older, higher-income savers, may force plan participants without a Roth option to forgo catch-up contributions, and are likely to shift tax-planning toward HSAs, changed pre-/post-tax contribution mixes, and TSP-specific adjustments (including TSP applying provisions for 2026 and a higher 60–63 catch-up limit of $11,250).

Analysis

Market structure: The SECURE 2.0 catch-up-to-Roth rule (threshold $150k FICA for 2025→2026) shifts marginal retirement flows from pre-tax to post-tax vehicles and elevates demand for Roth conversions, HSA providers, tax-advisory services and custodial platforms that facilitate Roth/after-tax flows. Winners are wealth managers and HSA administrators that monetize advice and account fees (AUM or per-account fees); losers are plan sponsors/legacy payroll/processors that must implement Roth mechanics or lose catch-up contributions from high-earners, compressing plan-fee pricing by an estimated low-single-digit bps industrywide. Cross-asset: expect modest near-term selling pressure in taxable fixed income as high-earners pay conversion taxes, a temporary cash-to-Treasury bid into short-term bills, and marginally higher demand for municipal credit among older cohorts over years.

Risk assessment: Tail risks include administrative implementation failures (ERISA/recordkeeper lawsuits) and state-level tax policy responses that could materially alter flows; probability low but impact high on plan vendors within 12–24 months. Immediate (days/weeks) risk is execution and guidance noise from major recordkeepers ahead of 2026 implementation; short-term (3–12 months) is revenue rephasing as clients accelerate Roth conversions in 2026; long-term (2–5 years) is structural AUM mix change with persistent fee reallocation. Hidden dependencies: employer offering of Roth options, payroll FICA reporting quirks, and collective-bargaining plan carve-outs could concentrate winners/losers geographically and by employer size.

Trade implications: Direct plays favor public wealth managers and HSA administrators (Morgan Stanley MS; HealthEquity HQY) and short-duration muni/IG reallocation trades to capture temporary tax-payment flows. Relative-value pair trades can express conviction: long advisory/HSAs vs short legacy payroll vendors that disclose implementation costs (monitor ADP, FISV commentary). Options strategies: buy 6–9 month call spreads on MS or HQY to capture guidance-driven re-rating while capping premium; size as 0.5–2% portfolio exposure.

Key Decisions for Investors

• Establish a 2–3% long position in Morgan Stanley (MS) over the next 6–12 months to capture incremental wealth-management and Roth-conversion advisory fees; use a stop-loss at -12% and trim half at +20%.
• Initiate a 1–1.5% tactical long in HealthEquity (HQY) for 6–12 months as HSA demand rises; express via a 6–9 month call spread (buy ATM call, sell 30% OTM) sized to cap premium risk to ~0.5% portfolio exposure.
• Reduce exposure to legacy payroll/recordkeeper business models by 1–2% (examples: ADP softness risk) and redeploy into short-duration municipal ETF (MUB) or short-duration IG corporate ETF (IGSB) to capture temporary cash inflows from conversion taxes over the next 3–9 months.
• Set monitoring triggers for an add/trim decision: if MS or HQY report >5% quarter-over-quarter growth in advisory/AUM fees or HSA account openings in next two earnings cycles, add 50% to positions; if ADP/FISV report unexpected >$50M implementation cost or client defections in next 90 days, initiate a tactical short up to 1% notional.