The registered disability savings plan (RDSP) was created to provide financial security for people with mental or physical disabilities. There are many reasons why someone may be eligible for the RDSP. Read on to find out what it is and what it can do for you.
Never heard of the registered disability savings plan? You're not alone! Even though it's one of our country's most advantageous savings plans, it's still widely unknown. According to Statistics Canada, in 2020, almost half of eligible residents in Canada who hadn't opened an RDSP had never heard of the savings plan.1
What's the RDSP?
It's a savings plan designed to help anyone who is eligible for the disability tax credit (DTC) save up for their long-term financial security.
So, who's eligible for RDSP benefits? As you might expect, plan beneficiaries must meet certain eligibility criteria set by the Government of Canada. You qualify if you:
- Are eligible for the Disability Tax Credit based (DTC) on the Canada Revenue Agency criteria
- Have a Social Insurance Number (SIN)
- Are under 60 years of age
- Are a resident of Canada when the plan is opened
Do you know someone who might be eligible? Are you wondering what the benefits are? Here are a few facts that might convince you, or your loved ones, to choose the RDSP.
Why open an RDSP?
1. It provides financial support for a person with a mental or physical disability
The RDSP was created to protect the beneficiary's long-term financial security, such as when their parents are no longer there to support them. So you'll be securing the financial future of a loved one while giving yourself peace of mind.
2. It gives access to helpful grants
The registered disability savings plan gives you access to the most government grants, which can be a big help for the family of a person with a disability. The RDSP can give the beneficiary two types of government grants. Here's a brief overview:
- Canada Disability Savings Grant (CDSG):
- Paid based on the beneficiary's net family income until the end of the year in which the beneficiary turns 49
- Yearly maximum: $3,500
- Lifetime maximum: $70,000
- Canada Disability Savings Bond (CDSB):
- No contributions have to be made to get the bond.
- Available to lower-income Canadians
- Annual bond of up to $1,000 and lifetime limit of $20,000
- Paid until the end of the year in which the beneficiary turns 49
3. It won't impact other benefits
It's also good to know that the payments made do not reduce the beneficiary's eligibility for federal income-based benefits, such as Old Age Security or the Guaranteed Income Supplement.
4. It generates tax-sheltered returns
The funds invested in an RDSP, and all the income it generates, can grow tax-free. However, as you'll see below, a portion of the withdrawals is taxable. Keep reading!
Does this savings plan seem like it might help someone you love? Have the RDSP's many benefits convinced you? You're probably wondering how to open an RDSP. Well, we've given you a brief description below.
How does it work?
1. How do I open an account?
To open an RDSP, speak with someone at your financial institution.
2. Who can be an account holder?
- An RDSP beneficiary over the age of majority who is competent to sign a contract is generally the holder.
- If the RDSP beneficiary is over the age of majority but is not competent to sign a contract, the holder is generally an individual or public department legally authorized to act in the beneficiary's name.
- If the RDSP beneficiary is under the age of majority, the holder can be a legal parent, legal representative or public department legally authorized to act in the beneficiary's name.
3. How do contributions work?
- Only the account holder or anyone with written permission from the account holder may contribute to the plan.
- There's no annual contribution limit, but the lifetime limit is $200,000.
- The contribution period is January 1 to December 31.
- Contributions may be made to the plan until the end of the year the beneficiary turns 59.
- Contributions made belong to the beneficiary, even if they aren't the person who made them.
- Contributions to an RDSP cannot be deducted from taxable income.
Good to know
You can catch up as much as 10 years' worth of unused grants and bonds before the end of the year in which the beneficiary turns 49. However, the beneficiary must have met the eligibility criteria during those years. The grant or bond will be paid based on the unused contributions, up to a maximum annual amount of $10,500 for the grant and $11,000 for the bond.
4. How do I make withdrawals?
To determine when and how much to withdraw and in what form, you should ask an advisor. There are two forms of withdrawal, both of which have special features and may not apply in certain situations.
- Lifetime disability assistance payments (LDAPs) are regular payments that must begin before the end of the calendar year in which the beneficiary turns 60.
- Disability assistance payments (DAPs) are lump-sum withdrawals that may be paid to the beneficiary at any time under certain conditions.
5. What happens if the beneficiary dies?
Grants and bonds paid into the RDSP must be paid back to the government if the beneficiary dies. Once these amounts are repaid, the balance, which includes the contributions and the investment income generated, is paid to the beneficiary's estate.
Good to know
Up to $200,000 (minus the contributions already paid to the RDSP) in proceeds from the RRSPs, RRIFs or RPPs (registered pension plans), or the accumulated income payment from RESPs of deceased parents or grandparents at the time of their death may be rolled over into the RDSP of a financially dependent child or grandchild (under certain conditions). However, it's important to know that the usual government grants are not paid on the amounts rolled over into an RDSP, and that those amounts will be taxable when they are withdrawn from the RDSP.
If you think the registered disability savings plan (RDSP) can help someone you love, don't hesitate to discuss it with an advisor. They can help you start the process and give you the tools you need to open an account.