Registered Disability Savings Plan: Financial Support for Individuals with Disabilities
The federal government introduced the RDSP in 2008 to help alleviate the financial demands that people with disability’s’ and their family’s face. Unfortunately, only about one third of Canadians who were eligible to claim the Disability Tax Credit (DTC) have taken advantage of the RDSP. Professionals and individuals have cited that bureaucratic withdrawal rules and low awareness of the plan as the main reasons for the limited participation.
Who should consider opening an RDSP?
Individuals that have a long- term disability and are:
Eligible for the Disability Tax Credit.
Under the age of 60 (a plan can be opened for an individual until the end of the year in which they turn 59).
A Canadian resident with a Social Insurance Number (SIN).
In the circumstance in which the dependent has not reached the age of majority the RDSP account can be opened by a parent, guardian or other representative who is legally authorized to act on behalf of a person with a disability. After the RDSP account is opened anyone can contribute to the account if they have the written permission of the plan holder or person that manages the RDSP on behalf of the beneficiary.
What are the benefits to opening and contributing to an RDSP account?
- Investments grow on a tax-deferral basis and then are taxable to the disabled beneficiary who usually has low income.
- The Federal government can match contributions by up to 300%. An RDSP can get a maximum of $3,500 in matching grants in one year, and up to $70,000 of lifetime grants on contributions made until December 31 of the year in which the beneficiary turns 49.
- For low income individuals the Federal government can pay the Canada disability savings bonds directly into an RDSP each year and until the year in which the beneficiary turns 49. The Government can pay bonds of up to $1,000 a year with a lifetime bond limit of $20,000.
- Income-tested federal benefits are not reduced because of RDSP withdrawals.
- Contributions can be taken out tax-free.
The grants, bonds, investment income earned in the plan, are included in the beneficiary’s income for tax purposes when they are paid out of the RDSP.
Understanding the withdrawal rules:
The goal of the RDSP account is to establish a pension plan for disabled individuals so that they have support when the system is not longer there for them. It is for this reason that there are rules in the plan to prevent withdrawals before they have had time to vest.
Withdrawals made before age 60 require that you pay back any deposits over the last 10 years, in triple the amount withdrawn annually, and up to the total deposit. For example, if you withdraw $500, you must repay $1,500 until the full grant/bond amount is repaid. However, if your life expectancy is five years or less you are permitted to withdraw up to $10,000 annually without penalty.
Withdrawals made after age 60 have no penalties. This is because contributions can only be made to an RDSP until December 31 of the year in which the beneficiary turns 49 allowing for the contributions to vest for 10 years.
Next step: Is the RDSP the best option?
A financial planner can help determine whether the RDSP is the best option for you and your disabled loved one. In some cases, it may be more beneficial to use a trust to provide for a disabled loved one’s future or a combination of an RDSP and a trust. Contact your advisor to learn more.