# To what amount will the single \$1000 contribution grow over the next 20 years if your RRSP earns…

To what amount will the single \$1000 contribution grow over the next 20 years if your RRSP earns 6% compounded monthly? Virtually all analyses of the issue fail to mention a logical alternative to borrowing money for an RRSP contribution. If your budget permits monthly payments on an RRSP loan over the next year, then an alternative to borrowing for an immediate lump RRSP contribution is to use the same budget “room” to start monthly contributions to an RRSP. A subtle but key point will now be developed. In the loan scenario, you immediately applied the tax saving to reduce the loan balance. In effect, you needed to borrow only 600 to make a 1000 RRSP contribution. The 1000 contribution cost you only 600. Similarly, if you make a monthly RRSP contribution of 100, it will really cost you only \$60 because of the \$40 tax saving. In other words, your after-tax cost is only 60% of your monthly contribution. Let’s turn the last point around and answer this question: How much can you contribute to an RRSP if the after tax cost to you is to be, say, \$50? In this case, the 50 cost represents 60% of your contribution. Therefore, the contribution is 50 0.6 = 83.33.

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