What is an RDSP?
Registered Disability Savings Plans are a federal program, created in 2008, that facilitates and encourages saving for the future needs of a person with a disability. The federal government matches funds that you and others contribute to the plan. For people with lower incomes, the government also provides Canada Disability Savings Bonds (CDSB).
For lower-income families with a disabled child, opening an RDSP as early as possible can mean hundreds of thousands of dollars will be available later in the child’s life.
How does the plan work?
You can open an RDSP for yourself or your child at your financial institution. Just make sure the institution you choose allows you to select your own investments for the plan. Similar to a Registered Education Savings Plan, the funds you contribute are not tax deductible but growth within the plan is tax-sheltered and is taxed on withdrawal in the hands of the plan’s beneficiary/?owner, who will most likely pay a lower marginal tax rate (grant and bond funds are also taxed on withdrawal). Anyone can contribute to the plan, including other family members and friends.
The level of government support is significant: if your family income is below $91,831, the government will contribute up to $3 for every $1 your family contributes (2018 amounts). This contribution is termed the Canada Disability Savings Grant. For the first $500 you contribute, the government will match your contributions 3:1. For the next $1,000, you will receive $2 for each $1 you contribute. The maximum annual grant is $3,500 and the lifetime maximum is $70,000. Even if family income is over $91,831, the government will contribute $1 for each $1 you contribute, to a maximum of $1,000 per year. “Family income” is based on the parents’ income if the disabled child is younger than 19. The year the child turns 19, eligibility for grants and bonds becomes based on the beneficiary’s income, even if they are living with their parents.
The CDSB is available for low-income earners (under $30,000); the bond is valued at $1,000 per year for up to 20 years. Partial CDSBs are available if your family income is between $30,000 and $45,916. Beneficiaries may receive both the grant and the bond.
Within the plan, you can invest in any products that are eligible for RRSP investing: stocks, bonds, GICs, mutual funds, savings account, etc. Neither growth within nor withdrawals from the plan affect the beneficiary’s provincial disability or income assistance benefits and there are no restrictions on how the beneficiary uses funds withdrawn from the plan.
RDSPs have a lifetime contribution limit of $200,000. Investment growth within the plan does not count toward that limit. If you open a plan now, you will be eligible for grants and bonds to your annual maximums as far back as 2008.
To qualify, the plan’s beneficiary must be eligible for the disability tax credit and the family must qualify for the Canada Child Tax Benefit if the beneficiary is under age 19. The disability tax credit is available to people with a mental or physical disability that is expected to last for at least a year and who are blind, need extensive therapy or treatment, or have limited ability to carry on activities of daily living.
Someone must be designated as the plan “holder” – this person manages the plan and makes the investment decisions. If the beneficiary is of legal age and legally considered able to manage their own financial affairs, the beneficiary may be the holder. If an adult beneficiary is not competent, a parent, spouse or adult guardian can be the holder. If the plan is being opened for a child, the child’s parent or guardian must be the holder. Once the child becomes an adult, the parent can be a joint holder with the adult child.
Plans cannot be opened for people over age 60 and contributions cannot be made after the end of the year the beneficiary turns 59.
If your RDSP received government bonds and/or grant funds, there is a 10-year holding period: if you withdraw from the plan within 10 years of the last government contribution, you will have to repay $3 of grant/bond funds for each $1 you withdraw. As well, if the government contributed more to the plan than you did overall, you may withdraw only a certain amount per year (determined by a formula). If you know for sure you will want to make significant withdrawals in less than 10 years, you may choose to decline the grants and bonds.
Withdrawals from the RDSP must begin when the beneficiary turns 60 but can begin at any time. Before you open your plan, make sure the financial institution allows flexibility for withdrawals. You may take a lump-sum payment or set up an annual payment plan.
Work with your financial advisor or an accountant experienced with RDSPs when setting up an RDSP for yourself or your child to ensure you benefit as much as possible and that withdrawals are handled properly, without penalty – many rules apply.