Should You Speed Up or Slow Down? Market Update and 401(k) Roth Catch-Up Changes

Subject: Should you Speed up or Slow Down?

Preheader: Lessons from my teenage driver, what’s going on in the market, and a 401(k) tax change you should know about.

Gas Pedal or Brakes

If you’ve never had the pleasure of driving with a new teenage driver, you may have missed out on one of life’s great thrills.

My oldest son, Brayden, received his driver’s permit just a few short months ago. I’m happy for him. It seems like fewer and fewer kids these days are interested in driving, so I’m glad he’s excited about it.

What I didn’t realize, being a first-time parent of a new driver, is just how much I take for granted my own years of experience behind the wheel.

New drivers simply don’t know what they don’t know.

For example, when the car in front of you unexpectedly slows down, you can gently apply the brakes instead of hitting the gas and swerving into the next lane without checking for oncoming traffic. 

Who knew?

This experience is not for the faint of heart. I've found myself giving thanks on more than one occasion for surviving a trip to the grocery store.

While contemplating the overall impact to my life expectancy, I got to thinking about how much driving has in common with investing.

Just like driving, there are times in the market to press down on the gas and times to ease onto the brakes. And just like new drivers, inexperienced investors often don't know what they don't know.

They can floor the gas, switch lanes without looking, and move through the market with little fear of the consequences. And sometimes, it works. Sometimes for a surprisingly long time.

But eventually, there's going to be a car in the other lane. And if you're moving too fast without paying attention, the consequences can be painful.

Experience teaches us that knowing when not to accelerate can be just as important as knowing when to hit the gas.

Which brings me to where we find ourselves in the market today. We enjoyed a nice run from April through June of this year. Outside of that, the market has been relatively uneventful (minus a few minor ups and downs).

I remain highly positive about the long-term prospects of the market and what AI/SI will be able to do for businesses. Unfortunately, I am seeing signs of weakness in the near-term that tells me it’s time to take our foot off the gas pedal for now.

I do not know how long this will last, nor how weak the market will get, but I believe it’s wise to be neutral/conservative for the time being.

Not every stretch of road calls for acceleration. Sometimes the smartest thing we can do is maintain a steady speed, keep our eyes on the road, and be ready to respond when something changes.

That's how we approach investing, too. And hopefully, with enough practice, Brayden will learn to do the same behind the wheel.

Allocation Updates

In most client accounts I have removed international investments. Although they have had a good run this year, they are facing headwinds in the face of a persistently rising US dollar which has led to their weakening vs. the domestic market.

If you recall, earlier this year I noted international investments do best when the US dollar is weak. So, a reversal in the dollar’s strength means overseas investing, by and large, becomes less attractive.

Instead of pouring this money back into the market I’ve chosen to keep it in very short-term bond-oriented investments. I’d like to see how the recent AI/tech volatility resolves before putting it back to work.

I’ve also removed the most growth-oriented investments from client accounts and moved these into short-term, interest-bearing investments. This is to structure accounts in line with the neutral/conservative approach I mentioned earlier in the newsletter.

What Changed in Your 401(k) This Year

If you are still working and putting money into your 401k, read up! Starting in 2026, if you're 50 or older and earned more than $150,000 in Social Security wages from your employer in 2025, any catch-up contributions you make to that employer's 401(k), 403(b) or governmental 457(b) plan must go in as Roth.

Not pre-tax. Roth. Catch-up contributions are the extra dollars people 50 and older can put into a workplace plan above the normal limit. For 2026:

- Regular employee limit: $24,500

- Age 50 and over: an extra $8,000

- Ages 60 to 63: a higher catch-up of $11,250 instead of $8,000, if your plan allows it

Roth means you pay tax on those catch-up dollars now, in exchange for the potential for tax-free qualified withdrawals later. Your take-home pay may look a little smaller than last year, even if you're saving the same amount.

This isn't a Roth conversion; it's about where new paycheck dollars land.

Where People Get Tripped Up

The threshold looks at last year's wages from your employer, specifically the Social Security wages in Box 3 of your 2025 W-2. Not your household income, and generally not wages from a different employer.

If you have RSUs, vest income typically shows up in your W-2 wages too, which can push someone over the line who didn't expect it.

The bigger surprise: if your plan doesn't offer a Roth option and you're over the threshold, you can't make catch-up contributions at all this year. You still have the regular $24,500 limit.

The IRS's final rules are fully required in 2027, but plans must apply the rule in good faith for 2026, so it's already live. Plans may automatically treat catch-ups as Roth for affected employees, and each plan sets this up a little differently.

Source: https://www.irs.gov/irb/2025-40_IRB

What Should I Do About It?

Some Roth dollars can add flexibility later, but nobody knows what tax rates will look like in twenty years, myself included. The point isn't to love or hate the rule. It's to know whether it applies to you and plan around it, including withholding and year-end cash flow.

If you'd like me to look at your paystub or plan election with you, I'm happy to do so.

In Closing

Thank you, as always, for your trust. If you know someone in their 50s or early 60s who is still working, still saving, and wondering how their retirement is going to turn out in the face of inflation and market swings, I would be grateful for an introduction. Referrals from clients remain the most meaningful way our practice grows.

Have a great end to your October!

All my best,

Garrett

Disclosure:

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.