TY  - JOUR
AU  - Amromin,Gene
AU  - Huang,Jennifer
AU  - Sialm,Clemens
TI  - The Tradeoff Between Mortgage Prepayments and Tax-Deferred Retirement Savings
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12502
PY  - 2006
Y2  - August 2006
UR  - http://www.nber.org/papers/w12502
L1  - http://www.nber.org/papers/w12502.pdf
N1  - Author contact info:
Gene Amromin
Federal Reserve Bank of Chicago
230 South LaSalle Street
Chicago, IL 60604-1413
Fax: Financial Economist
E-Mail: gamromin@frbchi.org

 jennifer_huang
Department of Finance, B6600
Red McCombs School of Business
University of Texas at Austin
Austin, TX 78712

Clemens Sialm
University of Texas at Austin
McCombs School of Business
1 University Station; B6600
Austin, TX 78712
Tel: 512-232-6835
E-Mail: clemens.sialm@mccombs.utexas.edu
M1  - published as Gene Amromin, Jennifer Huang, Clemens Sialm. "The tradeoff between mortgage prepayments and tax-deferred retirement savings," in Sören Blomquist and Roger Gordon, organizers, "Trans-Atlantic Public Economics Seminar (TAPES), Public Policy and Retirement" Journal of Public Economics, Volume 91, issue 10 (Elsevier Science Publishers) (2007)

M2  - featured in NBER digest on 2007-04-01
M3  - presented at "TAPES 2006", June 12-14, 2006
AB  - 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 mis-allocated 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 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.
ER  -