What is an RDSP?
REGISTERED DISABILITY SAVINGS PLANS
WHAT YOU SHOULD KNOW
BY: CHARLES GLUCKSTEIN
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.
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.
• 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)
Why are RDSPs beneficial?
• Investments held in an RDSP compound tax-free until they are withdrawn.
• Federally, the taxable portion of funds withdrawn from an RDSP do not impact income-based benefits such as the Canada child benefit (CCB), the Canada workers benefit (CWB), and the GST/HST credit.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 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
Although there are many good reasons to open an RDSP, only about one-third of eligible Canadians have. The road ahead may be uncertain, but knowing you’ve started saving for the future is always comforting.