Jane Wants to Save $1000 of Current Income

question 56

Essay

Jane wants to save $1000 of current income.With an RRSP,no taxes are paid on income or interest until the money is withdrawn in five years.Without an RRSP,taxes must be paid whenever income or interest is received.Jane's tax bracket is 35%,and the nominal interest rate is 8%.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?

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Definitions:

Compensatory Damages

Financial compensation awarded to a plaintiff to offset losses or injuries incurred due to the defendant's actions or negligence.

Nonbreaching Party

The party in a contract who has not violated the agreement terms.

Express Warranty

A clear, affirmative promise or assurance by a seller about the quality or nature of a product or service.

Oral Promise

A commitment made verbally by one party to another without written documentation.