In a working paper called The Tradeoff Between Mortgage Prepayments and Tax-Deferred Retirement Savings (summarized from the National Bureau of Economic Research website), several academics examined the mortgage vs. savings equation and came to this conclusion: “38 percent of U.S. households that are accelerating their mortgage payments instead of saving in tax-deferred accounts are making the wrong choice.”
Why would nearly 40 percent of people be better off socking away retirement savings vs. paying down their mortgage?
In a word, taxes. For most people, mortgage interest is tax-deductible, retirement plan contributions are deductible and their earnings are tax deferred.
This tax arbitrage makes retirement contributions a better choice, at least for some.