Understanding the Registered Disability Savings Plan & Getting Free Money

Back in Dec 1 2008 the Canadian government introduced the Registered Disability Savings Plan (RDSP) as a long term savings vehicle to help people with a disability build a more secure financial future. This blog will outline some of the key benefits of a RDSP.

Benefits of a RDSP:

1. Generous goverment "bonds" for low income beneficiaries. This is free money the the government will give without you having to make any contributions yourself. The maximum annual bond is $1000 with a lifetime maximum of $20,000. In order to qualify for the maximum bond the beneficiary's family net income needs to be less than $25,584 (2014). The bond is reduced for income levels up to $43,953 and eliminated for income exceeding $43,953.

2. Generous government of "grants" which is a matching program based on contributions to the RDSP. For family income under $87,907 the grant is $3 for every $1 of contributions on the first $500 up to $1500 a year. The grant will then be $2 for every $1 of contribution on the next $1,000 of contributions up to $2000. For family income exceeding $87,907 the grant is $1 for every $1 of contributions up to $1000.

3. You can carryforward unused grants and bond entitlements and get up to $10,500 of grants and $11,000 of bonds through contributions to cover unused entitlements.

4. Tax deferral of income earned inside a RDSP until withdrawal

5. Please note that grants and bonds are only paid up until December 31 of the year the beneficiary turns 49 years of age

Who can open an RDSP?

1. Must qualify for the disability tax credit

2. Has a valid social insurance number

3. Is a resident of Canada

4. Is under the age of 60

5. Anyone can contribute into the RDSP on behalf of the beneficiary

What happens if the beneficiary is no longer eligible for the disability tax credit?

In this case the RDSP must be closed and grants and bonds are subject to a 10 year repayment schedule where any grants or bonds paid within last 10 years need to be repaid. The 10 year repayment schedule also applies on the death of a beneficiary or withdrawal of funds.

How are the withdrawal of the money taxed?

Any bonds, grants and growth of the investment will be taxable upon withdrawal. Please note that the income from the withdrawal is excluded from "income" when calculating the GST/HST credit, Canada child tax benefits and the working income tax benefit. It is also excluded when calculating the social benefit repayment and refundable medical expense supplement. Withholidng taxes are not yet required but may be implemented in the future. Withdrawals needs start by December 31 of the year the beneficiary turns age 60.

In closing RDSP can be a bit complicated so feel free to message me if you have further questions.

*The content of this blog is for information only. Please seek indepedent advice from a qualified professional before taking any financial actions.