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Saving for a better future with a Registered Disability Savings Plan Thumbnail

Saving for a better future with a Registered Disability Savings Plan

Investment Retirement Funding

When you or your child is dealing with life-altering disabilities, the future is uncertain.

Careers can become question marks with no firm answer, which makes financial security very difficult, especially later in life when parents or guardians may no longer be around to help out.

That’s where Registered Disability Savings Plans (RDSP) come in.

A tool for managing the financial future of people with disabilities, RDSPs can help you ensure your child has a solid financial future no matter what happens to you. That peace of mind is invaluable.

However, accessing and properly utilizing these registered savings plans can be complex. To help you understand whether it’s right for you, we’ll walk you through the process of opening and funding an RDSP, as well as how to leverage government grants and bonds to maximize its usefulness.

What is an RDSP?

Much like an RRSP, an RDSP is a tax-sheltered savings vehicle designed to help Canadians save for the financial future. However, while RRSPs are a one-size-fits-all solution, an RDSP is designed by the Canadian government to specifically help Canadians with disabilities.

In many ways, an RDSP splits the difference between a TFSA and an RRSP.

  • Like a TFSA, RDSP contributions are from taxed income (i.e. they are not tax-deductible like an RRSP contribution). Income inside an RDSP is allowed to grow tax-free.
  • Like an RRSP, taxes are due upon withdrawal at the beneficiary’s marginal tax rate. This includes any money made from investments or money contributed by the government. It does not include, however the contributions, which have already been taxed and as such are not taxed again.

However, RDSPs also have a few features that neither TFSAs nor RRSPs have. 

  • The government offers deposit matching and stand-alone contributions to help account holders save. 
  • Income-tested benefits from the federal government are not reduced based on withdrawals from an RDSP.

Who is eligible?

An RDSP can only be opened by an adult who has qualified for the Disability Tax Credit (DTC), or the parent or legal guardian of a disabled child who qualifies.

To apply for an RDSP, the account holder (i.e. the person with the disability) must also be:

  • a Canadian resident
  • under 60 years old
  • have a SIN

Eligibility for the DTC

The biggest hurdle to jump over when opening an RDSP is applying for the DTC. This requires the applicant to have their disability certified by a doctor or a nurse practitioner. Only after certification can you apply (for yourself or for somewhere legally under your care).  

For more information on how to apply for the DTC, check out the government’s web page.

Opening, contributing and government assistance

Once the account holder has applied for the DTC and is eligible to open an account, they, or their parent/guardian, can open their RDSP with their financial advisor or at a financial institution. 

Once the plan is open, anyone can contribute as long as they have written permission from the beneficiary.

In theory, contributions can include investments in:

  • high-interest savings 
  • GICs 
  • mutual funds 
  • stocks 
  • bonds
  • exchange-traded funds 

However, because there are so few self-directed investment institutions that offer RDSPs, most are limited to high-interest savings, GICs, and mutual funds.

There is no annual contribution limit for RDSPs, however, they do have a lifetime contribution limit of $200,000. 

One of the most important, and beneficial, aspects of RDSPs is that they can trigger government assistance in the form of a grant and a bond. These can be quite generous, so it’s important to apply for them when opening an account.

RDSP Grant

The government will match contributions up to $3,500 annually, up to a maximum of $70,000 over the lifetime of the investment. That alone makes an RDSP an extremely valuable savings vehicle, as it’s the most generous matching program the federal government currently offers.

However, this grant is calculated based on income. For minors, the family’s household income dictates the amount of the grant. For those over 19, the grant is determined using the beneficiary’s household income (not including parents' income, if the beneficiary still lives at home).

For those with a household income of $93,208 or less, a deposit of $1,500 nets you the maximum grant of $3,500 by tripling the first $500 contributed and doubling the next $1,000.

For households that exceed that limit, the government simply doubles the first $1000 contributed.

This grant room accumulates, carrying forward for up to 10 years until the beneficiary turns 49. However, there is an annual maximum of $10,500 for the grant.

RDSP Bond 

The RDSP bond, on the other hand, is not based on contributions. For families/individuals (as applicable) who earn $46,605 or under, the government contributes $1,000 annually to an open RDSP, up to a lifetime maximum of $20,000.

Just like the grant, the bond can be carried forward for up to 10 years, up until the beneficiary turns 49. 

The annual maximum in this case is $11,000.

Withdrawals and taxes

Like RRSPs, RDSPs are designed to accumulate toward retirement, and the withdrawal rules reflect that by making it less attractive to take money out before 60.

If beneficiaries withdraw money before they turn 60, they must pay the government back for any deposits over the last ten years, triple the amount withdrawn, up to the total deposit. 

Example 

John is 50 years old and makes $45,000/year. He’s been consistently contributing to his RDSP to maximize the government bond and has received the grant for the last ten years. However, an unexpected cost has come up, so he decides to withdraw $1,000 from his RDSP. 

Over the past decade, John has received $3,500/year from the grant and $1,000/year from the bond, which equals $45,000. So, John must repay the government $3,000 (three times the amount withdrawn). 

Though that may sound like a lot, it’s important to remember you not only still get to keep any interest made on the bonds and grants, but it was free money to begin with and you’re never giving back more than you received.

There is some flexibility within it as well. If your life expectancy is 5 years or less, you can withdraw up to $10,000 a year without penalty.

As we discussed above, the government stops contributing to the RDSP when the beneficiary is 49. So, once the beneficiary hits 60, they are free to withdraw funds as they want (as the government won’t have contributed at all within the last ten years).

In fact, when you hit 60 the money has to be withdrawn.

The beneficiary can, however, choose how they want to withdraw it, either opting for a lump-sum payment or via scheduled, periodic payments, which the CRA will calculate based on the beneficiary’s age and the amount in the RDSP.

The good news is this money will not affect most provincial benefits. Even better yet, it won’t affect any federal benefits, including the Canada Child Tax Benefit or Old Age Security.

Finding your way through the RDSP labyrinth

Though RDSPs are great savings vehicles, the rules around them can get quite complex. That’s why it’s important to consult a financial advisor at each step of the process. This will help you make the most of the RDSP for your child or yourself.