Should you prepay your mortgage or fund your retirement account?

At least one recent study says your family may net an extra 11 to 17 cents per dollar if you route extra cash to your retirement account instead of paying off your mortgage.

In fact, by routing extra cash toward prepaying a mortgage rather than to a tax-deferred retirement account, families are losing $1.15 billion annually.

This study, published by the National Bureau of Economic Research, is by Federal Reserve economist Gene Amromin; Jennifer Huang, finance professor at the University of Texas; and Clemens Sialm, finance professor at the University of Michigan.

Of course, much depends greatly on the types of investments you make in your retirement account. Still, most people choose to prepay their mortgages because they don't like to take on debt and want to be able to have cash on hand. But that may be an overreaction:

Say you lose your job. Most households can borrow 50 percent of the tax-deferred assets in a 401(k) or 403(b) pension plans. In the worse-case-scenario, you can withdraw assets from your retirement savings by paying a 10 percent penalty. You'll owe ordinary income tax on withdrawals. But your taxes likely would be low because your household would be in a relatively low tax bracket.

If home prices appreciate over time, you can borrow from a home equity line without prepaying your mortgage. Meanwhile, if home prices fall dramatically and wipe out most of your home equity, you probably won't be able to take out additional home equity loans -- even if you have been prepaying your mortgage. But if you've been saving in a tax-deferred retirement account, you at least have those funds to tap, if necessary.

Worried about some day losing your home to bankruptcy?

The study said the arbitrage strategy of routing extra cash toward your retirement account rather than to paying down your mortgage does not increase your risk of default. Reasons:

You can always withdraw money from a tax-deferred retirement account to pay for the remaining mortgage.

Under new bankruptcy rules, employer-sponsored retirement plans are exempt from personal bankruptcy.

The study is based on the Federal Reserve Board's Survey of Consumer Finances from 1995 to 2004 for home mortgage prepayment data. The study assumed:

Mortgage prepayments were made on existing fixed-rate mortgages or new mortgages that were less than 30 years to maturity. They did not include mortgage refinances.

Pre-tax money that was used to prepay mortgages was invested in U.S. Treasury bond or mortgage backed securities, such as a mortgage bond fund, in a tax-deferred retirement savings account.

The households were assumed to have a constant tax rate over time. The mortgage rate and investment rate also were assumed to be constant over time. This assumption works well with a fixed-rate mortgage that is never refinanced. Also, the investor buys and holds to maturity Treasury bonds term-matched to the remaining life of the mortgage.

The household itemized deductions. So mortgage interest was subtracted from taxable income.

The mortgage remained at a fixed rate. There were no defaults or mortgage payoffs.