If you or someone you love has experienced a serious personal injury, you’ve already learned how a life’s best laid plans can change in an instant.
No one can predict all the unexpected challenges and detours we will encounter as we make our way through life, but there are still many actions we can take now to give us the best chance at building the kind of future we want.
One of the most important ways to prepare for your future is to work with a qualified financial planner to create a savings and investment strategy designed to give you a sense of security as you age. While there are many tools anyone can use to build such savings, governments recognize certain people face unique challenges that benefit from special targeted programming. Certain people with disabilities may be eligible for one such program.
By opening a Registered Disability Savings Plan (RDSP), eligible individuals not only access a significant amount of room for tax-deferred savings and investments, but they can also take advantage of lucrative matching government grants and income-tested bonds. In this blog post, we explain what an RDSP is and how it can benefit you and/or your family.
What is an RDSP?
A Registered Disability Savings Plan is a financial instrument people with disabilities can use to build savings for life after 60.
To be eligible to open an RDSP, a person must:
- qualify for the Disability Tax Credit (DTC)
- be 59 years old or younger
- live in Canada
- have a valid social insurance number (SIN)
Much like a Registered Retirement Savings Plan (RRSP), the RDSP permits a type of tax-deferred savings and investing. Rather than pay taxes on non-principal growth annually, an RDSP beneficiary would only pay taxes on these gains when funds are withdrawn from the account at maturity (with certain exceptions we outline later in the post).
The same types of investments available for RRSPs and also available for RDSPs, including: mutual funds, individual stocks, bonds, and guaranteed investment certificates. But, there are several ways RDSPs differ from RRSPs:
- Your contribution room is not dependent on your annual income, there is no annual contribution limit, and contributions are not tax-deductible. Instead, a life-time maximum of $200,000 can be added to an RDSP through individual contributions until the end of the calendar year the beneficiary turns 59 years old. In contrast, RRSP contributions can be made until December 31 of the year the holder turns 71.
- Only people who qualify for the disability tax credit (DTC) are eligible to open this type of savings plan. In the event a person no longer qualifies for the DTC, the RDSP can either be closed or remain open but restrict additional contributions. If the beneficiary regains the DTC in a future year, an existing RDSP reverts to normal contribution rules.
- Depending on your income and contributions in a given year, the government may provide matching grants of up to $3,500 annually (to a total not exceeding $70,000)
Even if no contributions are made to an open RDSP, the government may provide bonds of up to $1,000 per year (to a total not exceeding $20,000) depending on a beneficiary’s income.
Why are RDSPs beneficial?
While the lucrative government grants and bonds (essentially free money) grabbed headlines when RDSPs were created in 2008, these plans have other significant benefits:
- Investments held in an RDSP compound tax-free until they are withdrawn.
- Federally, the taxable portion of funds withdrawn from an RDSP do not impact income-based benefits such as the Canada child benefit (CCB), the Canada workers benefit (CWB), and the GST/HST credit. Additionally, these funds are excluded from calculations involving the social benefit repayment and the refundable medical expense supplement.
- In Ontario, and many other provinces and territories, an RDSP’s assets (money in the plan) and its income (money taken out of the plan) are fully exempt from determining eligibility for Disability Benefits.
What is the 10-year rule?
Financial institutions who issue RDSPs must keep an “assistance holdback amount” reserved equal to the grants and bonds paid over the previous 10-year period. For every dollar removed from an RDSP before its maturity date, $3 in grants and bonds must be repaid to the government up to the total “assistance holdback amount.”
The 10-year rule also applies if:
- the RDSP is terminated/closed
- the RDSP is converted into another type of financial plan
- the beneficiary loses DTC status prior to the age of 60 and the RDSP holder withdraws amounts
- the beneficiary dies
The 10-year rule does not apply under certain circumstances. When a beneficiary has a life expectancy of five years or less, up to $10,000 can be withdrawn from the plan annually (as well as a pro-rated amount of plan contributions) without having to repay grants or bonds added to the plan during the previous 10 years. However, this exception only applies when an election to consider the specified disability savings plan (SDSP) has been filed with the RDSP’s issuer and the issuer notifies Employment and Social Development Canada.
While making withdrawals from this account before a beneficiary turns 60 may come with some consequences, sometimes financial advisors will suggest making a one-time withdrawal to deal with unexpected expenses or funding education. This decision should be made in consultation with financial planners who are familiar with your complete wealth portfolio to determine if drawing on other funds would be preferable.
Conclusion
Although there are many good reasons to open an RDSP, only about one-third of eligible Canadians have. If you believe that you or a loved one is eligible for the RDSP, consult a qualified and reputable financial planner or make an appointment with your financial institution to discuss how you can join this program.
Best of all, even if you’ve missed out on taking full advantage of an RDSP in the past, you may be able to catch up on accessing the benefits of contributions. If you have met the eligibility requirements (approved for the DTC) for any of the past 10 years before opening an RDSP, or you were unable to contribute the maximum amount for matching grants, you can apply for unused grants and bonds subject to certain criteria.
The road ahead may be uncertain, but knowing you’ve started saving for the future is always comforting.