RDSP

The Registered Disability Savings Plan (RDSP) is a specialized savings plan designed to help Canadians with disabilities save for long-term financial security. Let’s break down the essential features, benefits, rules, and considerations to make RDSPs easier to understand and use.

Key Features and Eligibility

  • Who It’s For:
    RDSPs are ideal for Canadians under 60 with a severe disability who qualify for the Disability Tax Credit (DTC). Only one RDSP can be opened per individual.

  • Contributions:
    Contributions are not tax-deductible but can grow tax-free within the plan. Family members or legal guardians can also contribute to the RDSP.

  • Contribution Limits:
    The lifetime contribution limit is $200,000, with no annual limit on individual contributions.

 

Benefits and Government Incentives

  • Canada Disability Savings Grant (CDSG):
    This is a matching grant from the government, offering up to $3,500 per year and $70,000 over the beneficiary’s lifetime. Depending on family income, the government matches contributions at 100%, 200%, or even 300%.

  • Canada Disability Savings Bond (CDSB):
    Low-income individuals may also qualify for the CDSB, which provides an additional $1,000 annually, even without personal contributions, with a lifetime maximum of $20,000. This is available for individuals with family incomes under $34,863, and partial bonds for incomes up to $53,359.

  • Retroactive Claims:
    If eligible in past years, RDSP holders can catch up on unclaimed grants and bonds up to a limit of $10,500 for grants and $11,000 for bonds each year, going back as far as ten years.

 

Taxation, Withdrawals, and Payouts

  • Tax Rules:
    While personal contributions are not tax-deductible, investment income, grants, and bonds within the RDSP grow tax-free until withdrawal. Withdrawals must include these taxable components, so it’s wise to strategize around these tax implications.

  • Withdrawal Rules:
    Withdrawals can be complex. Generally, funds cannot be withdrawn for 10 years after the last grant or bond contribution without a repayment of those incentives. Payouts must also follow a fixed schedule once started and are taxed only on the government-contributed portion and investment growth.

  • Disability Assistance Payments (DAPs):
    DAPs are periodic or lump-sum payments designed to meet the financial needs of the RDSP beneficiary, including expenses for specialized care or disability support.

 

Advantages and Disadvantages

Advantages:

  • Access to significant government contributions through grants and bonds.
  • Tax-sheltered growth, allowing contributions to grow without taxation until withdrawal.
  • Support for long-term financial security and supplemental income.

Disadvantages:

  • Limited flexibility on early withdrawals due to repayment rules.
  • Taxable portions of withdrawals could impact other income-tested government benefits.
  • Dependence on DTC eligibility, which requires meeting specific disability criteria.

 

Transfer and Conversion Options

  • Transfers:
    RDSPs can accept rollovers from