The tradeoff between mortgage prepayments and tax-deferred retirement savings
By: Gene Amromin, Jennifer Huang, and  Clemens Sialm
Contributors: Huang, Jennifer, 1973-; Sialm, Clemens; Federal Reserve Bank of Chicago. Research Department
Series: Working paper series -- WP-2006-5; Working paper series (Federal Reserve Bank of Chicago. Research Department : Online) -- WP-2006-5.
Publisher: Federal Reserve Bank of Chicago
Published: 2006
Place of publication: Chicago, Ill.]
Language: eng
Format: [electronic resource] /
Subjects: Personal Finance; Retirement income; Mortgage loans
Description: "We show that a significant number of households can perform a tax arbitrage by cutting back on their additional mortgage payments and increasing their contributions to tax- deferred accounts (TDA). Using data from the Survey of Consumer Finances, we show that about 38% of U.S. households that are accelerating their mortgage payments instead of saving in tax-deferred accounts are making the wrong choice. For these households, reallocating their savings can yield a mean benefit of 11 to 17 cents per dollar, depending on the choice of investment assets in the TDA. In the aggregate, these misallocated savings are costing U.S. households as much as 1.5 billion dollars per year. Finally, we show empirically that this inefficient behavior is unlikely to be driven by liquidity considerations or other constraints, and that self-reported debt aversion and risk aversion variables explain to some extent the preference for paying off debt obligations early and hence the propensity to forgo our proposed tax arbitrage."--Federal Reserve Bank of Chicago web site.
Notes: Title from PDF file as viewed on 10/12/2006.

Includes bibliographical references.

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Mode of access: World Wide Web.