The tradeoff between mortgage prepayments and tax-deferred retirement savings
Gene Amromin (),
Jennifer Huang and
Clemens Sialm ()
No WP-06-05, Working Paper Series from Federal Reserve Bank of Chicago
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.
Keywords: Mortgage loans; Retirement income; Taxation (search for similar items in EconPapers)
Date: 2006, Revised 2006
New Economics Papers: this item is included in nep-fmk and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
http://www.chicagofed.org/digital_assets/publicati ... s/2006/wp2006_05.pdf (application/pdf)
Chapter: The Tradeoff between Mortgage Prepayments and Tax-deferred Retirement Savings (2007)
Journal Article: The tradeoff between mortgage prepayments and tax-deferred retirement savings (2007)
Working Paper: The Tradeoff Between Mortgage Prepayments and Tax-Deferred Retirement Savings (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:fip:fedhwp:wp-06-05
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in Working Paper Series from Federal Reserve Bank of Chicago Contact information at EDIRC.
Bibliographic data for series maintained by ().