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Secure Your Future with RDSPs: A Comprehensive Guide Thumbnail

Secure Your Future with RDSPs: A Comprehensive Guide

Investing & Wealth Building

A Registered Disability Savings Plan (RDSP) offers attractive benefits that can help ensure the long-term financial security of persons with disabilities. If you or a loved one is disabled, an RDSP is a great way to save and invest for the future.

Understanding RDSPs: The Basics

What you need to know about RDSPs

What is an RDSP?

A registered disabilities savings plan (RDSP) is a savings plan to help parents and others save for long-term financial security of a person who suffers from a severe and prolonged disability.

Who Qualifies?

An RDSP can be opened for any Canadian resident under the age of 60 who qualifies for the Disability Tax Credit (DTC). A qualifying individual can only be the beneficiary of one RDSP at any given time.

Who Can open an RDSP?

If the beneficiary has reached the age of majority and is legally able to enter into a contract, then the beneficiary can open their own RDSP.

If the beneficiary is age of majority but is unable to enter into a legal contract and/or is a minor the legal parent of the beneficiary, a legal guardian or a public department agency or institution legally authorized to act on behalf of the beneficiary can open the account.

Making contributions to an RDSP

Contributions are made with after-tax dollars, and while there is no annual limit, there is a lifetime maximum of $200,000. Contributions can only be made until the end of the year the beneficiary turns 59. Anyone can contribute to an RDSP, provided they have written permission from the plan holder.

What is a Canada disability savings grant?

A Canada disability savings grant is an amount that the government of Canada contributes to an RDSP. The government will pay matching grants of 300, 200, or 100 percent, depending on the beneficiary’s family income.

An RDSP can get a maximum of $3,500 in matching grants in one year, and up to $70,000 over the beneficiary’s lifetime. Grants are paid on contributions made until December 31 of the year the beneficiary turns 49.

What is a Canada disability savings bond?

A Canada disability savings bond is an amount paid by the government of Canada directly into the RDSP. The government will pay bonds of up to $1,000 per year for low-income Canadians with disabilities. No contributions are required to receive the bond. There is a lifetime bond limit of $20,000. A bond can be paid into an RDSP until the year in which the beneficiary turns 49.

Note: The beneficiary family income thresholds for the grant and bond are indexed each year to inflation. The income threshold changes from year-to-year. To have a better understanding of the grant allocation or bond you are entitled to, refer to the income table which can be found on The Canada Revenue Agency website.

FAQ

Frequency asked questions about RDSPS

How do withdrawals work?

1. Lump sum withdrawals are one-off payments and can be made anytime – called disability assistance payments (DAPs).

2. Ongoing, regular payments – called lifetime disability assistance payments (LDAPs). Must begin no later than the end of the year the beneficiary turns 60. Once started, LDAPs must continue until the RDSP is terminated or the beneficiary dies. LDAP amounts are also subject to an upper limit determined by a government-prescribed formula.

How are withdrawals taxed?

The portion of the withdrawals that consists of grants, bonds and any investment income earned are included in the beneficiary’s income for tax purposes when withdrawals are made. RDSP issuers report the taxable portion of the payments from the plan in box 131, located in the “Other Information” area of a T4A slip. Taxation on any growth in the plan is deferred until withdrawals are made.

What happens if a beneficiary no longer qualifies for the DTC?

The RDSP must be terminated and all amounts must be paid out of the plan by December 31 following the first calendar year that the beneficiary is no longer considered to have a severe or prolonged impairment.

What happens if a beneficiary dies?

The RDSP must be closed and all amounts remaining in the plan must be paid out to the beneficiary’s estate and the plan terminated, by December 31 following the calendar year in which the beneficiary dies.

When do grants and bonds have to be repaid?

If any of the following events occur, all government grants and bonds paid to the plan during the preceding 10 years before the event must be repaid to the Government of Canada. Repayments are required when:

  • The RDSP is terminated;
  • The plan is deregistered;
  • A disability assistance payment ( DAP ) is made from the plan;
  • The beneficiary stops being eligible for the disability amount; or
  • The beneficiary dies

Do RDSP’s affect other government benefits?

No, federal benefits such as the Guaranteed Income supplement, Canada Pension Plan and Old Age Security are unaffected by RDSP-related benefits.

Can funds in an RDSP be invested?

Yes, all amounts within an RDSP can be invested. There is no tax on investment gains while funds remain in an RDSP. Growth and grant are taxed as income when it comes out of the plan.