What is an RDSP and How Does it Work?

Posted on by Tax Partners
30
Dec

Introduction

A Registered Disability Savings Plan (RDSP) is a government-registered savings program designed to provide financial security for individuals with disabilities. Despite its significant advantages, the RDSP remains one of Canada’s least-utilized registered savings plans, with nearly a million eligible Canadians yet to open one.

The RDSP allows investments to grow tax-free within the account, offering a powerful tool to build long-term financial stability for people with disabilities. Moreover, the plan includes government contributions through the Canada Disability Savings Grant and the Canada Disability Savings Bond, which can substantially boost savings.

This guide explains how the RDSP works, who qualifies, the rules for contributions and withdrawals, the types of investments allowed, and how to decide if it’s the right choice for you or your loved one.

How Does the RDSP Work?

An RDSP operates similarly to other registered plans like the Tax-Free Savings Account (TFSA) or the Registered Education Savings Plan (RESP). Contributions grow tax-free, and while anyone can contribute to the plan, the beneficiary must qualify for the disability tax credit (DTC). The DTC is a non-refundable tax credit that reduces the taxes owed by individuals with a “severe and prolonged impairment” or their supporting family members.

Key Advantages of RDSPs:

  1. Tax-Free Growth: Investments in the RDSP grow tax-free, enabling faster compound growth.
  2. Government Contributions: The Canada Disability Savings Grant and Canada Disability Savings Bond offer matching contributions or direct payments, enhancing savings significantly.

Canada Disability Savings Grant and Bond

  1. Canada Disability Savings Grant (CDSG):
    • A matching grant that pays up to $3,500 annually, depending on the beneficiary’s family income.
    • Lifetime contribution limit: $70,000.
    • Matching percentages:
      • 300% for the first $500 contributed (if income ≤ $106,717).
      • 200% for the next $1,000 contributed (if income ≤ $106,717).
      • 100% for contributions of up to $1,000 (if income > $106,717).
  2. Canada Disability Savings Bond (CDSB):
    • Offers up to $1,000 annually for low-income beneficiaries, even if no contributions are made.
    • Lifetime limit: $20,000.
    • Eligibility is income-based:
      • Full bond for incomes ≤ $34,863 (2023 threshold).
      • Partial bond for incomes ≤ $53,359.

Who Qualifies for an RDSP?

To open an RDSP, the beneficiary must meet these criteria:

  1. Eligibility for the Disability Tax Credit (DTC).
  2. Canadian residency at the time the RDSP is set up and contributions are made.
  3. Valid Social Insurance Number (SIN).
  4. Be under age 60 when opening the RDSP (contributions stop at the end of the year the beneficiary turns 59).

For beneficiaries under 18, the account holder must be:

  • A legal parent.
  • A guardian or legally authorized representative.
  • A public institution authorized to act on their behalf.

Contribution Rules for RDSPs

  1. No Annual Contribution Limit:
    While there is no cap on yearly contributions, the lifetime contribution limit is $200,000.
  2. Maximizing Government Contributions:
    Spreading contributions over several years can optimize matching from the Canada Disability Savings Grant.
  3. Contribution Deadline:
    Contributions can be made until December 31 of the year the beneficiary turns 59.

RDSP Withdrawals and Tax Implications

  1. Tax-Free Contributions: Withdrawals of personal contributions are tax-free.
  2. Taxable Portions: Withdrawals from government grants, bonds, and investment earnings are taxed as income for the beneficiary.
  3. Lifetime Disability Assistance Payments (LDAPs): Automatic annual withdrawals begin in the year the beneficiary turns 60 and continue for life.

Investment Options for RDSPs

RDSPs offer diverse investment options to maximize growth potential:

  • Guaranteed Investment Certificates (GICs).
  • Mutual Funds and Segregated Funds.
  • Exchange-Traded Funds (ETFs).
  • Stocks and Bonds listed on designated exchanges.
  • Canada and Provincial Savings Bonds.

A diversified portfolio combining these options can help optimize returns while managing risk.

Frequently Asked Questions About RDSPs

  1. Can I open an RDSP without the DTC?
    No, qualifying for the disability tax credit is mandatory.
  2. Are RDSP contributions tax deductible?
    No, contributions are not tax-deductible, but investments grow tax-free.
  3. What happens if I withdraw funds early?
    Withdrawing government contributions within 10 years triggers a repayment of grants and bonds.
  4. Can anyone contribute to an RDSP?
    Yes, with the account holder’s consent.
  5. Can I transfer an RDSP?
    Yes, RDSPs can be transferred between financial institutions.

Conclusion: Is an RDSP Right for You?

An RDSP is a powerful tool for providing financial security to individuals with disabilities. With tax-deferred growth, government contributions, and flexible investment options, it offers significant advantages for long-term savings. However, it’s essential to ensure the beneficiary qualifies for the disability tax credit and to carefully plan contributions to maximize government grants and bonds.

For anyone eligible, the RDSP is a valuable resource to consider. A financial advisor can provide expert guidance, helping you optimize contributions, select appropriate investments, and align the RDSP with your overall financial goals.

This article is written for educational purposes.

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at info@taxpartners.ca, or by visiting our website at www.taxpartners.ca.

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.

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