Fed Reserve Study 2006

This document summarizes a study that analyzed the tradeoff between prepaying mortgages and contributing to tax-deferred retirement accounts. The study found that about 38% of U.S. households that are accelerating mortgage payments could benefit financially from instead increasing contributions to tax-deferred accounts. Reallocating savings in this way could yield returns of 11-17 cents per dollar, saving U.S. households up to $1.5 billion per year. The behavior seems to be driven by an aversion to debt rather than financial considerations, as mortgage interest payments are tax deductible while retirement account earnings are tax deferred, making retirement accounts the more advantageous choice for many households.