Federal Reserve Paper and Commentary
October 31, 2006 posted by Ancora Financial Comments (0)
The Tradeoff between Mortgage Prepayments
and Tax-Deferred Retirement Savings
August, 2006
Abstract
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…
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One of our own federal banks—Chicago’s Federal Reserve Bank—has determined that by accelerating mortgage payments instead of stashing money in tax-deferred accounts, more than one in three Americans are making the “wrong choice,” and are giving up potentially important arbitrage gains.…
