Danielle Kubes is a trained journalist and investor who has written about personal finance for the past six years. Her writing has been published in The Globe and Mail, National Post, MoneySense, Vice and RateHub.ca. Danielle writes about investing and personal finance for Wealthsimple. She has a Bachelor of Humanities from Carleton University and a Master of Journalism from Ryerson University.
Why is an RDSP so important
The RDSP is an essential tool for managing the financial future of people with disabilities. It can also help establish peace of mind for parents and other loved ones, whose most pressing fear is often who will support their children once they’re gone.
That’s why in 2008 the federal government created the RDSP. The first account of its kind in the world, it was designed specifically to help alleviate the fiscal demands that people with disabilities and their families face, and to advance agency, confidence, and self-worth.
Saving in an RDSP offers five major advantages compared to a regular account:
All investments grow tax-free
Ottawa will deposit up to $20,000 to low-income families with no contribution necessary.
Ottawa will match deposits by up to an incredible 300%, up to $70,000 to incentivize contributions.
Income-tested federal benefits are not reduced because of withdrawals.
Getting your own money back out is tax-free (withdrawing bonds, grants and investment growth, however, is taxed).
Unfortunately, few Canadians are taking advantage of the plan. Only 29% of Canadians who were eligible to claim the Disability Tax Credit(DTC) (DTC) opened an RDSP in 2016. Although it’s beginning to become more popular: 150,726 plans were open in 2016, up from just 99,000 in 2014.
That may be because of some of drawbacks of the RDSP:
Complex and bureaucratic withdrawal rules—far more than other tax-shelters
Eligibility for the DTC is c
and may require reassessment
Low awareness of the plan
Investment opportunities are limited to old-fashioned tools
You’re eligible to be a beneficiary of an RDSP if you’re under 60 years old and a resident of Canada with a social security number.
A doctor or nurse practitioner must certify that you have severe and prolonged impairment to physical or mental functions by sending the DTC application to the CRA, who will then assess your eligibility. Depending on the nature of the disability, the CRA may request you be reassessed again in the future.
Previously, if you were found to no longer qualify you were required to close the plan and repay the government, although Ottawa has recognized that this does not accurately reflect the nature of disabilities, many of which are episodic.
Applicants can get help filling out applications at local non-profit disability community organizations.
How to open, contribute and invest in an RDSP
Once the CRA deems one eligible for the DTC, a plan holder can open an RDSP at a financial institution. Most major banks and credit unions offer RDSPs, as well as some mutual fund brokerage and the application process is similar to opening any other tax-sheltered account.
A plan holder can be a parent or legal guardian, or the beneficiary himself if he is over 18 and contractually competent to enter into a plan. But anyone, not just the holder, can contribute to the RDSP with written permission of the beneficiary.
Technically, any investment can be held in an RDSP, including high-interest savings, GICs, mutual funds, stocks, bonds, and exchange-traded funds. In reality, however, there are few self-directed investment brokerages that currently support RDSPs. That means that you’re limited to stashing contributions in high-interest savings, GICs, or mutual funds.
The government pays up to $1,000 annually to low-income Canadians, up to a lifetime maximum of $20,000. The threshold for family net income is $46,605 and you don’t need to contribute first. In addition, the bond room accumulates for 10 years from the time you became eligible for the DTC until age 49, to an annual maximum of $11,000. So don’t feel like you can’t catch up, just because you’re in your 30s or 40s—you can still make significant headway.
Unlike the bond, the grant is matched to contributions.
Ottawa will match private contributions up to $3,500 annually up to a lifetime maximum of $70,000. That’s the most generous matching program the government currently offers. (In comparison, the lifetime maximum match for an RESP is only $7200.)
The matching amount depends on income—if you’re a minor, it’s based on your family income, and at 19 it’s based on your own household income.
With a family income of $93,208 or less you must deposit $1,500 to get the maximum grant of $3,500. The government will triple up to the first $500 contributed, and double up to the next $1000 contributed
With a family income of more than $93,208, the government will double the first $1,000 contributed.
Grant room also accumulates and carries forward 10 years until age 49, to an annual maximum of $10,500.
How to get both the bond and grant
You can actually receive both the bond and the grant at the same time, because the bond is based on income but grants are matched to contributions, no matter where they come from. Therefore, the true maximum lifetime amount you’re eligible for is $90,000.
So if, for example, you’re making $15,000 a year working part-time, you’ll get $1,000 from the bond. Then, if your grandparents, who make $80,000 a year, contribute $1,500, the government will raise it by $3,500, for a grand total of $4,500 annually.
Simply apply for these programs at the financial institution that holds your RDSP, and the government will deposit the funds automatically.
To understand the withdrawal rules of the RDSP, it’s important to note that the account was designed to substitute as a kind of pension plan for retirement when the support system for the beneficiary had passed. The rules are in place to prevent cashing out funds before they’ve had time to accumulate. If you can wait until age 60 to take out money, you’ll get to keep the full value of any grants or bonds, plus take advantage of the compounded growth.
Before age 60 You’re allowed to take out some money before 60, either a lump-sum or through scheduled payments. The exact amount depends on if private contributions have exceeded government ones. But to deter you, the government mandates that you must pay them back for any deposits over the last 10 years, triple the amount withdrawn, up to the total deposit. So if you take out $1,000, you must repay $3,000 until the full grant/bond amount is repaid. This sounds like a lot, but remember that you still get to keep any interest on that money, and it was free in the first place anyway. Don’t let this clause intimidate you from opening a plan.
And the RDSP does have some flexibility—if your life expectancy is five years or less, for example, you’re allowed to withdraw up to $10,000 a year without penalty.
After 60 Since Ottawa stops funding grants and bonds after you turn 50, you must be 60 before you can withdraw funds free (because then you’ll have 10 years of no government contributions). In fact, you must.
You can withdraw a lump-sum or choose to schedule a periodic payment for which the CRA will calculate the exact amount based on the value of the RDSP and your age.
It won’t affect most provincial benefits and any federal benefits either, such as the Canada Child Tax Benefit or Old Age Security.
Since the withdrawal rules for an RDSP are more complex than other tax-sheltered accounts, it’s wise to consult a financial advisor before taking out any funds.
RDSP tax rules
Keep in mind that even though the RDSP is a tax-sheltered account, its impossible to escape your civic duty. Tax must be paid at some point.
Contributions: Any contributions are made with after-tax dollars. Unlike RRSP contributions, they cannot be deducted from income.
Growth inside the account: All investments flourish protected from the long-reach of the CRA while inside the belly of the RDSP.
Withdrawals: Dues have already been paid on contributions, so you get to take those out without further obligation. But what about all that government moolah and all that interest and dividends and capital gains that’s been thriving tax-free for all these years? Think of the RDSP as an umbrella, shielding you from the harsh, tariff rain. As soon as that umbrella is retracted, the CRA swoops in and takes its cut.
In other words, when you withdraw grants, bonds and investment growth you’re taxed at your marginal rate.
Note that Wealthsimple does not currently support RDSPs, although we are looking closely at this possibility.
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