Canadians seem to know a lot about TFSA, RRSP, RRIF and RESP. RDSP? Not so much. To begin, RDSP is an acronym for Registered Disability Savings Plans. Former finance Minister Jim Flaherty announced the start of the RDSP program in December 2008 with much fanfare (CBCnews). At a press conference he touted the unique plan as a global first. “We are leading the world in this initiative, and I expect it will be copied in many places around the world,” Flaherty said (CBCnews).
Sure, there are flaws and concerns about the program. Some go as far as stating the government is trying to make the sign-up process confusing just so it won’t have to pay out all that money. However, I beg to differ. For Canadians with disabilities, the RDSP is an effective way to build long-term financial security. Last week, I was able to attend a presentation done by Edward Ku, Vice President of BMO Global Asset Management and he justifiably said, this could be a $1-million nest egg account with the help of tax-free growth from earnings while the money remains in the plan.
Who qualifies to be the beneficiary of this plan? Has to be a Canadian resident, under age 60, has a valid social insurance number and the person should be eligible for Disability Tax Credit. The maximum lifetime contribution into this plan is $200, 000 and the plan matures at age 60. Furthermore, only one RDSP is allowed per beneficiary. And, in order to apply for the Disability Tax Credit, one can download Canada Revenue Agency Form T2201 at http://www.cra-arc.gc.ca.
What about government incentives? There are two huge incentives from the government – Canada Disability Savings Grant and Canada Disability Savings Bond. The first plan may qualify for up to $3500 annually, to a lifetime maximum of $70,000 in grants. Annual contribution is required to qualify for the Canada Disability Savings Grant. The second plan may qualify for up to $1,000 annually, to a lifetime maximum of $20,000 in bonds and NO annual contribution is required to qualify for the Canada Disability Savings Bond. Music to my ears. Hey, the government can be courteous at times. There is a catch. I hope we are still friends after you read this. Both these incentives are only available until age 49.
How can you maximize your grants and bonds? For grants, if your annual net income is $90,563 or less, you can contribute $1500 annually. The government will contribute $3 for every $1 contributed on the first $500 and $2 for every $1 contributed on the next $1000 which earns maximum annual grant of $3500 as mentioned earlier. For those who make more than $90,563 annually, you can contribute $1000 annually and the government will contribute $1 for every $1 contributed. For bonds, we said no annual contribution is required. Yipee. If your annual net income is $26,364 or less, the government will contribute $1000 annually. And for those whose annual net income is more than $26,364 and less than $45,282, the government will contribute up to $1000 based on their income.
Another luring factor about the RDSP is earnings grow tax-free while in the plan akin to a RRSP, RESP, RRIF or TFSA. As a result, it helps money invested grow faster so the beneficiary can accumulate more. Beneficiaries with low income pay little tax. However, withdrawals from the plan will be taxed in the hands of the beneficiary. In this case, TFSA is the winner during withdrawals of income or capital as both can be done tax-free.
What happens in the death of the Beneficiary? All grants and bonds received in the 10 years preceding the beneficiary’s death must be returned to the government. The remaining grants, bonds, income growth and account holder contributions will pass to the beneficiary’s estate. Lastly, the proceeds of the plan will be distributed according to the individual’s will. If the individual dies without a will, the funds will be distributed according to provincial estate laws. Please check with your provincial government, as every province is unique in its own way. This is only for Ontario.
Still not convinced to open an RDSP even when you are eligible? My personal opinion, bad move. Remember, the earlier you contribute, the more you can maximize government incentives. What are you waiting for?
Urgen is a nursing student who loves soccer and tennis. He also loves nutella and Liverpool F.C. He considers himself to be tetralingual, a passionate bibliophile, an ambivert, a huge fan of index funds and Toronto Public Library. He is a recipient of Stephen E. Quinlan Award and a member of Seneca men’s varsity soccer team. Also, he is the first Seneca student to conduct a workshop during the recent Seneca Leadership Institute. He is a tutor for first year nursing students at his campus. Can be reached at firstname.lastname@example.org.