Jane wants to save $1000 of current income. With an RRSP, no taxes are paid on income or interest until the money is withdrawn in five years. Without an RRSP, taxes must be paid whenever income or interest is received. Jane's tax bracket is 35%, and the nominal interest rate is 8%.
a. How much money will Jane have if she puts her money in an RRSP and withdraws the money in five years?
b. How much money will Jane have if she does not put her money in an RRSP, but rather in a regular (taxable) savings account, for five years?
c. How much does Jane gain in five years by using an RRSP rather than a regular savings account?

Question

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The Answer of Jane wants to save $1000 of current income. With an RRSP, no taxes are paid on income or interest until the money is withdrawn in five years. Without an RRSP, taxes must be paid whenever income or interest is received. Jane's tax bracket is 35%, and the nominal interest rate is 8%.
a. How much money will Jane have if she puts her money in an RRSP and withdraws the money in five years?
b. How much money will Jane have if she does not put her money in an RRSP, but rather in a regular (taxable) savings account, for five years?
c. How much does Jane gain in five years by using an RRSP rather than a regular savings account?

Jane Wants to Save $1000 of Current Income