Much like a Registered Retirement savings Plan (RRSP), the Registered Disability Savings Plan (RDSP) was designed to allow individuals who have disabilities the ability to save for their retirement. The advantage of having an RDSP is that the Government of Canada will retroactively contribute up to $90.000 in grants and bonds until the end of the year of the beneficiary's 49th, birthday. This means that if the plan is opened when the beneficiary turns 21 years of age the government will deposit grants and bonds from up to the previous 10 years.
An individual receiving ODSP who is 18 years of age and can sign a binding contract can have an RDSP in their name without their income being affected. A parent/guardian or entity with legal authority to act can open an RDSP on behalf of an individual who has the disability if they are under 18 or cannot sign a legally binding contract. An RDSP is considered fully exempt for the purposes of all federal benefits and most provincial benefits. RDSP's can accept up to $200.000 in personal contributions and has unlimited investment potential.
The table below explains how much grants and bonds will be deposited into the RDSP.
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GRANTS |
CONTRIBUTED BY THE FEDERAL GOVERNMENT |
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The Government of Canada will contribute a maximum of $70,000 in grants until the end of the year of the beneficiary's 49th, birthday. |
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If the family income is less than $100,392 |
For the first $500 of private contributions the grant will be $3.00 for every dollar contributed in a 12-month period ($500 X $3.00 = $1,500). For the next $1,000 they will deposit $2.00 in a 12-month period ($1,000 X $2.00 = $2,000). |
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If family income is greater then $100,392 |
For the first $1,000 of private contributions, the grant will be $1.00 for every dollar contributed in a 12-month period ($1,000 X $1.00 = $1,000). |
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The Government of Canada will contribute a maximum of $20,000 in bonds until the end of the year of the beneficiary's 49th, birthday. |
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BONDS |
CONTRIBUTED BY THE FEDERAL GOVERNMENT |
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If the family income is $32,797 or less |
The bond will be $1,000 |
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If family income is between $32,797 and $50,197 |
The bond will be a pro-rated amount |
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If the family income is more then $50,197 |
There are no bonds available |
The figures above are based on family income. Once the beneficiary reaches 19 years of age the available grants and bonds would be based on their income. If the beneficiary is married or common law, "family income" is comprised of their collective net taxable income. For more information on RDSP's please click here
There are additional costs a person will have to incur because of their disability. The Disability Tax Credit (DTC) was introduced to help reduce taxes for those individuals. This non-refundable tax-credit will allow individuals to be eligible to open an RDSP. To be eligible for the Disability Tax Credit (DTC) a medical professional must certify that the applicant has a prolonged medical condition and the effects of the condition will severely impact their daily life.
To find out more about the Disability Tax Credit (DTC), please click here.
RDSP’s were established to create a long-term retirement savings vehicle for individuals with disabilities with the government contributing up to $90,000 in grants and bonds until the end of the year of the beneficiary's 49th, birthday. Withdrawals must start by the end of the year of the beneficiary's 60th, birthday.
There are penalties if early withdrawals are made with the government implementing the 10 Year Proportional Repayment Rule. If grants and bonds are deposited within 10 years of the plan being opened, withdrawals will not be allowed without having to pay back some of the money obtained by the government. For every $1.00 withdrawn the government will take back $3.00 of grants and bonds that were deposited into the plan within the previous 10 years. As an example, Aaron opened his RDSP 6 years ago and has $60,500 in his plan. $15,000 is his own contribution, $45,000 being contributed by the government and $500 in interest. Aaron needed to borrow $12,000 from his RDSP which means that he would have to pay back $36,000 of government contributions. This would leave $12,500 in Aaron’s RDSP, $3,000 in personal contributions, $9,000 in government contributions and $500 in interest. The money that Aaron would have to pay back is called the “assistance holdback amount” which is the grants and bonds that were contributed within the last 10 years. The 10 years are calculated from the exact date the grants and bonds were deposited into the RDSP. Personal contributions and interest are considered property of the beneficiary and do not have to be paid back to the government.
In addition to having an RDSP, it is a good idea to set up an emergency savings fund. This will eliminate the temptation to have to dip into your RDSP for unforeseen circumstances.
If a Disability Assistance Payment (DAP) is requested, the 10 Year Proportional Rule will apply. However, after the beneficiary turns 60 all government contributions are considered the property of the beneficiary. If the beneficiary has more personal contributions then government contributions, the beneficiary can request a withdrawal from the plan. However, if there are more government contributions, the DAP would not be allowed. If there is a financial hardship, a formal request can be made to the issuer who would then submit the request to the Registered Plans Directorate of the Canada Revenue Agency.
Once the beneficiary turns 60 years of age, they have until the end of the year to start withdrawing from their RDSP. The Lifetime Disability Assistance Payments (LDAPs) is a series of systematic payments that occur until the beneficiary turns 83 years of age. LDAP must begin by December 31 of the year the beneficiary turns 60 years of age. Beneficiaries may request that the LDAPs begin before the end of the year. However, they must also consider the tax and investment consequences that may occur.
Payments are calculated by taking the value of the RDSP at the end of the previous year. The annual payment will be the total value of the RDSP divided by the number of years until the beneficiary turns 83 years.
An RDSP is a combination of personal contributions, government grants, bonds and interest earned. When withdrawals are made only personal contributions are not taxed because they were made with after tax dollars. Government grants, bonds and interest earned are subject to tax.
The information on this page was derived from the RDSP Plan Institute website and can be found here.