All About the Registered Disability Savings Plan (RDSP)

The Registered Disability Savings Plan (RDSP) is a government-assisted savings plan designed to help people with disabilities in Canada and their families to save for their long-term financial needs. This plan provides tax-deferred growth as well as government bonds and grants. In this article, we will outline the eligibility criteria for opening an RDSP, the different types of contributions, investment options available, rules for making withdrawals, and the circumstances under which an RDSP may be terminated.

How Does the Registered Disability Savings Plan Work?

The RDSP is a government-assisted savings plan designed to help Canadians with disabilities and their families save for their long-term financial needs. The beneficiary and their family or others may make contributions that will grow tax-deferred. The government provides a bond and matching grants. Contributions may continue until ten years before the account is intended to create an income.

Who is Eligible to Open a Registered Disability Savings Plan?

An RDSP can be opened by a beneficiary who has reached the age of majority or by a legal parent or guardian of the beneficiary. When you open an RDSP, the government will verify your eligibility before they provide any grant money. To open an RDSP, the beneficiary must:

• be a resident of Canada with a valid Social Insurance Number (SIN),
• be eligible for the Disability Tax Credit (DTC), which requires certification from a physician or medical practitioner, and
• be under 60 years old.

What are the Financial Benefits of an RDSP?

The RDSP allows for three types of contributions: personal contributions, family and friend contributions, and government grants and bonds. Contributions are not tax-deductible, but the government provides matching grants and bonds. The Canada Disability Savings Bond (CDSB) provides up to $1,000 per year where the family has a low income, with no requirement for personal contributions. The Canada Disability Savings Grant (CDSG) provides matching grants of up to $3,500 per year, depending on the beneficiary's income level and contribution amount.

Contributions can be made by the beneficiary of the RDSP, by the holder, or by anyone who has permission from the holder. While there are no annual contribution limits, there is a lifetime contribution limit of $200,000. One of the most significant advantages is the tax-deferred growth, meaning that the investments' earnings held in the RDSP are not subject to tax until withdrawn, which can contribute to significant long-term growth.

If the beneficiary becomes ineligible for the Disability Tax Credit, the RDSP may remain open, but no further contributions may be made.

What Investment Options are Allowed in an RDSP?

An RDSP can hold qualified investments that are generally the same as those that qualify for a Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA). However, only a limited number of financial institutions are able to open an RDSP. Typically, a bank branch can open an RDSP, but can only offer a savings account. RDSPs can also hold guaranteed investment certificates (GICs), stocks, bonds, mutual funds or other investment funds, but must be opened with a financial advisor or stock broker to do so. It is important to consider your time horizon and risk tolerance when making investment decisions. A diversified investment portfolio can help to manage risk while providing the possibility for long-term growth.

How Does the Beneficiary Receive Payments from the RDSP?

Another significant benefit of an RDSP is its flexibility. Beneficiaries can take payments from the RDSP either as a one-time payment or as recurring payments. Payments can begin at any time before December 31 of the year in which they turn 60. Withdrawals can be made earlier if the beneficiary’s life expectancy is five years or less. Otherwise, any bonds or grants received in the ten years before the withdrawal will need to be repaid.

When you make a withdrawal, your capital (the money you contributed) is not taxed. The beneficiary will include in their taxable income the amounts from bonds, grants and growth. The amount of taxes owing is calculated on their tax return, and depends on their total taxable income for the year. Note that payments from an RDSP do not impact other income-tested federal government programs, including Old Age Security (OAS), Guaranteed Income Supplement (GIS), the Goods and Services Tax Benefit (GST Benefit) and social assistance benefits.

You can learn more about withdrawing money from an RDSP from the Government of Canada.

What Happens When the RDSP is Closed?

If the beneficiary of the RDSP passes away, the funds in the plan can be transferred to the beneficiary's estate or to a named beneficiary. However, it is important to note that the funds will be taxed as income in the year they are withdrawn.

Other Government Programs for Families

The Canada Pension Plan Disability benefit (CPP-D) offers a monthly payment if you are unable to work due to disability.

The Assured Income for the Severely Handicapped (AISH) provides financial and health benefits for Albertans who cannot earn a living because of a permanent medical condition. This benefit is not affected by RDSP income.

Families can use a Registered Education Savings Plan (RESP) to save on behalf of children and youth and attract government bonds and grants to fund post-secondary education.

You can read more articles about investment solutions and other financial topics. If you have questions about this article or would like a conversation about how these ideas apply to your unique situation, call us at 403-290-0940.