The Registered Disability Savings Plan (RDSP) was introduced by the
government of Canada to help families and people with disabilities save
for their long-term financial security.
The benefits of saving in an RDSP:
Contributions to an RDSP are not tax-deductible, but they grow within
the plan on a tax-deferred basis. In addition, contributions may be
eligible for the Canada Disability Savings Grant (the grant) and the
plan may be eligible for the Canada Disability Savings Bond (the bond).
The grant provides matching contributions; no contributions are required for lower income individuals/families to receive the bond. Together, they could add up to $90,000 to your RDSP.
There is a lifetime contribution limit of $200,000 per beneficiary and no annual contribution limit.
Note that withdrawals trigger the repayment of any grant or bond received during the previous 10 years.
Making the most of your RDSP:
Here are some age-related strategies that may help you maximize the value of your plan, depending on your circumstances.
When the beneficiary is a young child:
- Make contributions that attract the grant as early as possible, to
maximize tax-deferred growth and to minimize the effect of the grant “clawback” — if a withdrawal is made, any grant payments received in the previous 10 years must be paid back.
- Try to make an annual contribution large enough to attract the maximum matching grant contributions. The earlier you start, the better chance you will have of reaching the maximum grant amount of $70,000.
- The tax-deferred status of contributions makes the RDSP an ideal way to invest in long-term solutions like a growth oriented mutual fund.
When the beneficiary is a young adult:
- Try to contribute every year because the grant and bond cannot be received following the year the beneficiary turns age 49. Even if there is no intention to contribute, the bond can be maximized simply by
opening the plan early enough.
- Upon reaching the age of majority, a beneficiary who is capable of
managing his or her own finances can become the holder of his or her own plan. This isn’t compulsory, however. If you are the parent and have been the holder while the beneficiary was a minor, you can continue as holder.
- At this stage, an investment solution that strikes the right balance
between growth and safety may make sense depending on when withdrawals
When the beneficiary is a mature adult (40+):
- Contributions to an RDSP do not qualify for grant contributions
following the year the beneficiary turns 49. In addition, plans are not
eligible for the bond after this time. But beneficiaries can still
benefit from tax-deferred growth by contributing up until the year they
turn age 59.
- Lifetime Disability Assistance Payments (LDAPs ***See explanation below)
can begin at any age but must begin by the end of the year in which the
beneficiary turns age 60. Consider waiting at least 10 years after the
final grant and bond have been received into the plan before requesting
LDAPs; otherwise, the grant and bond payments received in the previous
10 years will have to be returned to the government.
- The portion of the LDAP consisting of grant, bond and investment
income is taxable at the beneficiary’s marginal rate, which may
influence the decision to begin payments. For example, if the
beneficiary’s marginal tax rate is likely to decrease at retirement age,
it may be advantageous to delay LDAPs until that time.
- More conservative investment options, including those that generate
regular tax-efficient income while providing some growth to offset
inflation, should be considered as payments from the RDSP must begin.