The Registered Disability Savings Plan or RDSP for short. is a plan that allows people with disabilities and their families to save up money that can be used for long-term financial security of the person with a disability. Who qualifies to open one of these up? Where can you open one up? how does it work? What is the benefits? When can contributions be made? Why use this plan? I think that covers the 5 W’s of the stuff I want to cover with this blog post.
Why use this plan?
The Government setup the RDSP to try to help people with disabilities and their families save money and create long-term financial security for the person with a disability. The idea behind the plan is to create an account like a RRSP for the person with a disability that will help them later in life, when most people would be drawing on a RRSP. The plan has a Canadian Disability Savings Grant portion and a Canadian Disability Savings Bond portion. Combined with the money that is contributed and the money in this account will pile up pretty fast. For someone with a disability, this becomes a very useful way to save for old age.
When can contributions be made?
Since contributions are not tax-deductible, they can be made any time up until the year the beneficiary turns 59. Each year there is a CDSG and CDSB that are added into the account. If the beneficiary’s family income is less than $77,664, the first $500 they contribute will earn a CDSG of $1,500. the next $1,000 that they contribute will earn a CDSG of $2,000. So on the first $500 you contribute, you get an instant, once the paper work is processed, 300% return. The next $1,000 you contribute will earn 200% when looking at the Government grant portion. If the beneficiary’s family income is greater than $77,664, then you would get $1,000 from a CDSG for the first $1,000 contributed. that is still a nice 100% increase in the account. The income thresholds are indexed to inflation and will go up over time.
The CDSB (Canadian disability savings Bond) is given to beneficiaries of low-income families (less than $21,816) they get a government bond of $1,000 for the account. If the family income is between $21,816 and $38,832, then that bond is reduced in size based on some complex rules, the account holder will still get something, but it will be less than $1,000. If the family income is greater than $38,832, then there is no bond.
What are the Benefits?
I stated above that contributions were not tax-deductible. Any time we look at one of these savings vehicles whether it be a RRSP or a TFSA or in this case a RDSP, we have to look at the taxes on three different portions of the life of the account we are setting up. Those portions are Contributions, Growth and Withdrawals. Contributions are not tax-deductible, and so therefore are made with after tax money, like a TFSA. Growth within the account is tax-free, like the RRSP and TFSA and Withdrawals are sort of not taxed. When it comes time to tax money out, there is a bit of a claw back if the CDSG and CDSB were contributed by the government over the previous 10 years. Also investment income earned that is withdrawn ends up on the beneficiary’s tax return. It is very complicated, but in the end, There is some tax on the withdrawals.
How does it Work?
Other then the Government grant and bonds that go in, the maximum life-time contribution room is $200,000. Other then that, it works just like an RRSP in terms of how it grows. The RDSP can hold any RRSP eligible investments. That would include Bonds, Equities, Mutual funds, etc. While we are the topic of maximum contributions, the CDSG has a maximum contribution over the lifetime of the plan of $70,000. The CDSB has a lifetime contribution maximum of $20,000.
Where can you open one up?
There is a very good question. To figure this out I left the government website that I was on to gather the other information I reported above and I moved back to Google to see if I could find a list. I could not. Wikipedia didn’t even have any information. I do know from my searching that TD, RBC, BMO and Scotiabank all offer the RDSP. However I don’t believe this to be a complete list of places. This is something I will have to continue to look into. After much extra searching the information on what institutions can open one of these up for you can be found Here.
Who is eligible to Open one up?
Anyone with a disability who is currently claiming a Disability Tax Credit (Form T2201), can be the beneficiary of the RDSP. Anyone with written permission of the plan holder can contribute to the plan.
For more information on the RDSP check out this government website: Click Here
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