Jane Wants to Save $1000 of Current Income

question 11

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 With an RRSP, no taxes are paid on income or interest until the money is withdrawn in five years.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:

Rationed

The controlled distribution of scarce resources, goods, or services, typically in contexts of scarcity, war, or economic conditions.

Privatization

The transfer of ownership or control of services or industries from the public sector to private individuals or organizations.

Acupuncture

A form of traditional Chinese medicine involving the insertion of very thin needles through the skin at specific points on the body, used to treat various physical and mental conditions.

Specialized Medical Education

Programs and training in the medical field that focus on a specific area of medicine, allowing health care professionals to gain advanced expertise in particular treatment methods, medical procedures, or patient populations.