At the start of 2009, Canada's financial world experienced a tremendous buzz when the Tax Free Savings Account was rolled out. But just one month earlier, there was another program unveiled that has not been given its proper due. If you're eligible for it and you haven't acted on it yet, I encourage you to read on.
The Registered Disability Savings Plan, or RDSP, was introduced in December 2008 to help people with disabilities have a more stable financial future. I am a big fan of this program and think that anybody who qualifies for the program should enroll. There is a lot of money on the table in the form of Canada Disability Savings Bonds and Canada Disability Savings Grants for those who can benefit from this program.
What is the RDSP?
The RDSP is a program designed somewhat like the Registered Education Savings Plan that helps parents fund their children's education. The RDSP provides an annual matching grant that the government will kick in when money is contributed to the plan.
The amount of the grant depends on the family income of the person with the disability, but we'll get to that in a moment. For beneficiaries with a lower income, there is also an annual Canada Disability Savings Bond of up to $1,000 that can be accessed without contributing any money to the plan, again based on the level of income.
Who Qualifies for the RDSP?
To qualify for the RDSP, the beneficiary of the program (the person with the disability) must meet four criteria. He or she must:
- be under the age of 59
- be a Canadian resident
- have a valid Social Insurance Number
- be eligible for the Disability Tax Credit (DTC)
It is out of the scope of this article to talk about what disabilities qualify for the Disability Tax Credit. The best advice I can offer on that is if you or someone you know might be eligible, see your doctor who can fill out a CRA form (T2201) to make that determination. If a person meets the other three criteria listed above but hasn't done the DTC paperwork, he or she can still open the RDSP while the DTC paperwork is in progress but if CRA denies the DTC application, the RDSP will have to be closed and any bond or grant received will have to be returned to the government.
The Bonds and Grants
This is the best part of the RDSP and the thing that has made Canada a leader in its support of people with disabilities around the world. Here's what's available:
The Canada Disability Savings Bond:
- If the family income of the beneficiary is $25,356 or less, a $1,000 bond is available. The government will deposit the bond into the RDSP without the beneficiary having to contribute anything.
- If the family income is between $25,356 and $43, 561, a prorated bond is available. CRA has a formula to calculate the amount.
- For families with income of more than $43, 561, no bond is available.
The Canada Disability Savings Grant:
- If the beneficiary's family income is $87,123 or less, the government will match 300 percent of the first $500 contributed to the RDSP. ($500 x 300% = $1,500)
- On the next $1,000 contributed to the plan, the government will match 200 percent. ($1,000 x 200% = $2,000)
To put that in plain English: If $1,500 is contributed to the RDSP and the beneficiary's family income is under the threshold, the government will throw in $3,500.
- If the beneficiary's family income is over $87,123, the government will match 100 percent of the first $1,000 contributed. (A dollar for dollar match.)
Family income is based on the household income if the beneficiary is under 18 years of age. If the beneficiary is 18 or over, the family income is based on his or her income, and that of their spouse, if any.
The Limitations of the RDSP
There are a few limitations and restrictions to know about with the RDSP. First, there are the contribution limits:
- Maximum lifetime Disability Bond that can be received is $20,000
- Maximum annual Disability Bond is $1,000
- Maximum lifetime Disability Grant that can be received is $70,000
- Maximum annual Disability Grant is $3,500
- Maximum lifetime contribution limit is $200,000
There is no limit to the amount that can be contributed to the plan in a year.
If a person has qualified for the RDSP since its inception in 2008 but hasn't started one yet, it may be possible to 'catch up' on missed bonds and grants. If you're starting an RDSP and want to find out about how much you're eligible to catch up, call the government's RDSP hotline at 1-866-204-0357.
- Registered Disability Savings Bond and Grants can only be received up to the end of the year the beneficiary of the plan turns age 49.
- Similar to the Registered Retirement Income Fund (RRIF) which must be withdrawn no later than age 71, the beneficiary of the RDSP must begin collecting from the plan at age 60.
- The biggest restriction on the RDSP is the penalty for withdrawing the money early. A beneficiary can request a payment from the RDSP at any time in the form of a Disability Assistance Payment (DAP) but if the beneficiary withdraws money from the plan prior to age 60, there is a claw back of three times the amount of the withdrawal or to the maximum Assistance Holdback Amount (AHA). The AHA is the total amount of Disability Bonds or Grants received in the 10 years preceding the date of the DAP withdrawal.
When it's time to take out the money
At age 60, when it's time to start receiving income from the RDSP, the money will be taxed in the hands of the beneficiary, who presumably will be in a low tax bracket. The payments will be received in the form of Lifetime Disability Assistance Payments (LDAP) and will consist of three parts: contribution, bonds & grants, and growth. Only the growth, bond and grant portions of the LDAP will be subject to income tax.
More Information about the Registered Disability Savings Plan
How to get started
Sadly, not all financial institutions offer the RDSP to their clients. Each of Canada's big five banks offers the program, but the smaller companies do not seem interested at this time. In fact, I once asked a major investment company if they had plans to offer the RDSP and was given a straight out no, that they didn't feel the market was large enough.
Related: No Fee Banking Is Totally Worth It
At least there are five choices out there, so if you qualify for the RDSP but haven't opened one yet, now is a good time to look into it. The bonds and grants are impressive and that's a lot of money being left on the table by anyone not taking advantage of the program.