REGISTERED DISABILITY SAVINGS PLAN (RDSP)
WHAT IS IT?
The RDSP is a registered plan (akin to an RRSP) the purpose of which is to help disabled Canadians and their families save for the future.
WHO QUALIFIES?
The RDSP is available to individuals who are: under age 60, a Canadian resident with a Social Insurance Number and eligible for the Disability Tax Credit.
MECHANICS OF THE PLAN?
The RDSP is an excellent savings plan that allows individuals to take advantage of government grants and bonds. Contributions to the plan can be made by anyone (family or friends), in any amount, however there is a lifetime contribution limit of $200,000. Contributions must be made before the beneficiary turns 60. Unlike RRSPs contributions made to the plan are NOT tax deductible. Like the RRSPs investment income earned in the plan is tax deferred until withdrawn.
As a incentive to save, the Federal Government will pay a matching grant up to $3,500 (depending on family income) and may also pay a bond of up to $1,000 to low- and modest-income families. The maximum lifetime grant and bond is $70,000 and $20,000 respectively. In order to qualify for the grand and bond, contributions for the year must be made before December 31. The grants and bonds are payable until the beneficiary turns 49.
Withdrawals from the plan must begin when the beneficiary turns 60. The capital portion of the withdrawal is not taxable (paid with after tax dollars). The investment income portion earned, grants and bonds are taxed in the hands of the beneficiary upon withdrawal. In order to encourage savings grants and bonds must remain in the plan for 10 years; if grants and bonds are withdrawn within the 10 year period all grants and bonds are required to be paid back.
EXAMPLE
The following example assumes the beneficiary is over the age of 18. Different rules apply to beneficiaries under the age of 18. The name used in this example does not refer to a particular individual and is for illustrative purposes only.
Rick is a hearing impaired 23 year-old who qualifies for the Disability Tax Credit. He has the legal capacity to manage his own finances. Rick visits his financial advisor with an interpreter inquiring about the Registered Disability Savings Plan. Rick is single and his net income is $20,000. In order to maximize grants and bonds Rick will contribute $1,500 to the plan.
|
Rick’s Net Income |
Matching Grant / Bond |
Grant / Bond Received |
|
$20,000 |
On first $500 annual contribution ($3 for every $1 contributed) |
Rick contributed $1,500 and therefore will receive a grant of $1,500 (3 multiplied by $500) |
|
On the next $1,000 annual contribution ($2 for every $1 contributed) |
Rick contributed $1,500 and therefore will receive a grant of $2,000 (2 multiplied by $500) |
|
|
Family income of $21,816 qualifies for $1,000 bond |
Rick earned less than $21,816 and therefore will receive a bond in the amount of $1000 |
|
|
Rick’s $1,500 annual contribution given a net income of $20,000 will yield a total of $4,500 in grants / bonds. |
||
The example above assumes a low level of net income. As net income increases the bonds and grants will decrease according to a predefined scale.
CONCLUSION
The RDSP is an excellent savings tool. Government grants and bonds make the plan very attractive. In fact it should be – the intent of the plan is to help Canadians with disabilities and their families save for the future. Information contained in this article is intended to provide general information about the plan. There are detailed rules within the plan that will need to be discussed. The RDSP is not for everyone! Please visit your financial advisor to learn more about the plan and determine if it is right for you.
Submitted by JR Moy
Financial Advisor – Love & Persson Group
