Disability can take many forms and can sometimes pose a constraint to employment or an obstacle to financial security. If this is your case or that of someone close to you, the Registered Disability Savings Plan (RDSP) can make a big difference. Here’s what it is and how to take advantage of it.
Like the Registered Retirement Savings Plan (RRSP), the RDSP is a registered savings plan. In both cases, money is deposited over a period of time and the beneficiary enjoys certain incentives.
But the similarities end here. RRSPs and RDSPs don’t have the same objective, and they don’t provide the same advantages. Let’s compare the two:
RDSPs are eligible for two different government grants:
1. Canada Disability Savings Grant (CDSG)
2. Canada Disability Savings Grant (CDSG)
The calculation of the grant and bond amounts is based on family income. There are also criteria and conditions to be met.
How do you maximize the grants?
When you open an RDSP, the government sends you a document telling you how much you need to contribute to maximize your grants.
Registered Disability Savings Plan contributions and grants grow tax free.
Tax deductions at source
As with RRSPs, a portion of any withdrawal from an RDSP is withheld at source (set aside) to pay taxes. This helps you avoid unpleasant surprises.
Depending on your income, having an RDSP and receiving grants in the plan doesn’t impact your eligibility for other social programs in most provinces and territories. You can therefore receive the RDSP benefits and still do certain training courses, internships and activities, and receive grants or services. The benefits keep on growing.
Only individuals eligible for the disability tax credit (DTC) can open a Registered Disability Savings Plan.
Someone who becomes ineligible for the DTC because their condition has changed doesn’t automatically have to close their RDSP. If they become eligible again later on, they can start contributing to their RDSP and benefitting from the grants once again.
In addition to the DTC, these criteria must also be met to be an RDSP holder:
The lifetime contribution maximum is $200,000. There’s no annual maximum. Be aware that:
There are three main categories of RDSP withdrawals:
Important: The withdrawals cannot exceed the annual withdrawal limit.
Warning: For each $1 withdrawn (LDAP or DAP), $3 of any grants or bonds paid into the plan in the previous 10 years must be repaid to the government. After 10 years, these amounts no longer have to be repaid.
When withdrawals are made:
RDSPs are quite complex, so it’s best to call on a specialist to help you plan how to make the best use of yours.
Contact a financial institution that offers RDSPs, like National Bank. Here are the two possible scenarios depending on the beneficiary.
If they are contractually competent and have reached the age of majority, the RDSP beneficiary can also be the plan holder. The plan holder is the person who opens the RDSP and makes or authorizes contributions.
If they are not contractually competent or have not reached the age of majority, a parent or any other person or legally authorized agency or institution can be the RDSP plan holder. The plan holders can change over time. For example, if the plan holder dies or is not longer contractually competent, a new plan holder must be designated.
If the beneficiary dies, the RDSP is closed. The government grants and bonds paid into the RDSP over the previous 10 years must be repaid. Any funds remaining will be paid to the beneficiary’s estate. The plan must be closed by December 31 of the year following the calendar year in which the beneficiary dies.
The proceeds of a deceased parent’s or grandparent’s RRSP or RRIF can be transferred tax free to the RDSP of a child or grandchild, up to a maximum of $200,000 (less the contributions already made to the RDSP).
The funds in an RRSP, for example, are transferred to an RDSP. This inheritance will remain untouched as long as it isn’t withdrawn.
No grants: The usual government grants are not paid into the RDSP on amounts that are rolled over.
The Registered Disability Savings Plan is an essential tool for protecting the long-term financial security of persons living with a disability. Though numerous, the advantages are not widely known.
Fortunately, our team of advisors is here to help you open your RDSP and take advantage of all the benefits you’re eligible for.
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