The future is always uncertain and more so for those of us with family or friends who have a disability. The late Finance Minister Jim Flaherty understood this struggle and fought tirelessly to improve life for disabled individuals. He introduced the Registered Disability Savings Plan (RDSP) to Canada and with it a means for disabled individuals to accumulate wealth without losing much needed government social assistance.
What is an RDSP?
It is a savings plan administered by the government of Canada that can be opened on behalf of, or by the disabled beneficiary.
Who is eligible to have an RDSP?
- A beneficiary who
- is eligible for the disability tax credit
- has a valid SIN
- is resident of Canada
- is under the age of 60
How does an RDSP Work?
Throughout the lifetime of the RDSP, family and friends can contribute a maximum of $200,000 into the plan until the beneficiary reaches age 59. There are no annual contribution limits. The government will match contributions with the Canada Disability Savings Grant and the Canada Disability Savings Bond. The RDSP is similar to the Registered Education Savings Plan or RESP, as contributions to an RDSP are not tax-deductible, but investment income is earned tax-free while in the plan.
Canada Disability Savings Grant: an amount paid directly by the government into an RDSP up to $3,500 per year. The amount of government contribution depends on other contributions each year and the beneficiary’s family income. The maximum lifetime grant is $70,000.
- Family income is below $87,123
- $3 for each $1 contributed on the first $500
- $2 for each $1 contributed on the next $1,000
- Family income is above $87,123
- $1 for each $1 contributed up to a maximum of $1,000 per year
Canada Disability Savings Bond: an amount paid directly by the government into an RDSP up to $1,000 per year with a lifetime maximum of $20,000. This bond, like the grant, depends on family income of the beneficiary.
- Family income of $25,356 or less, the bond will be $1,000 per year
- Family income between $25,356 and $43,561, the bond will be calculated based on a formula in the Canada Disability Savings Act
- Family income above $43,561, no bond will be paid
Both Canada Disability Savings Grants and Canada Disability Savings Bonds can be paid into an RDSP up until the end of the year in which the beneficiary turns 49.
Is there anything else I should know about the RDSP?
Yes, the “Ten Year Rule” requires that all government grants and bonds received in the ten preceding years be repaid to the Government of Canada if the following occur:
- RDSP is terminated or deregistered;
- The beneficiary dies;
- The beneficiary withdraws from the plan prior to age 60.
Effective for withdrawals made after 2013, a new proportional payment rule will apply when a withdrawal is made from an RDSP. Under this rule, for each $1 withdrawn from an RDSP, $3 of any Grants or Bonds paid into the plan during the preceding 10 years will be repaid.
Why should you consider an RDSP?
- Money within the RDSP grows tax-free until it is withdrawn by the individual;
- Opening an RDSP allows for additional savings opportunities through the Canada Disability Savings Grant and the Canada Disability Savings Bond (up to $90,000!) over the lifetime of the RDSP;
- Funds within an RDSP will not impact your eligibility for government assisted social programs.
While there are significant upsides to the RDSP, it is important to evaluate what is best for your situation. The RDSP is a savings plan and if money is withdrawn too early, there are penalties. These penalties can be steep and include repayment of all of the government contributions not held in the plan for at least 10 years. When deciding if the RDSP is right for you consider your future needs, current situation, and life expectancy.