If you or someone you care about qualifies for the Disability Tax Credit (DTC), the Registered Disability Savings Plan (RDSP) can be an excellent way to build financial security for the future. This savings plan is designed to help Canadians with disabilities and their families save for long-term needs. Here is a quick guide on what you need to know about RDSPs: 

Who Can Open an RDSP?

An RDSP involves two main roles: the holder and the beneficiary. The holder manages the plan, making key decisions about investments and withdrawals, while the beneficiary is the person who will receive the benefits from the plan. For children, a parent or guardian must be the holder. If the beneficiary is an adult who can manage their own financial affairs, they can be their own holder. If not, an adult guardian or legal representative will take on the holder role.

How Does an RDSP Work?

Once your RDSP is set up anyone can contribute to it—whether it’s the holder, family members, or even friends. One of the greatest perks of an RDSP is the potential to earn extra funds through government grants and bonds. These grants and bonds, along with any personal contributions, grow on a tax-deferred basis, meaning you won’t pay taxes on the investment growth until you start withdrawing the money. Even if you’re unable to contribute yourself, opening an RDSP can still be beneficial since you may still qualify for government bonds.

When the beneficiary turns 60, withdrawals can begin, providing a valuable source of income for retirement.

Who Qualifies for an RDSP?

To qualify for an RDSP, you need to be a Canadian resident with a valid Social Insurance Number (SIN), under the age of 60, and eligible for the Disability Tax Credit (DTC). The DTC is a non-refundable tax credit that helps individuals with disabilities or their supporting family members reduce their income tax burden. To qualify, a medical practitioner must confirm that you have a severe and prolonged impairment in physical or mental functioning that lasts at least 12 months and causes significant restrictions at least 90% of the time.

If you or your child qualify for the DTC you’re likely familiar with provincial support programs like the Ontario Disability Support Program or Alberta’s Assured Income for the Severely Handicapped, which can be impacted if your assets or income exceed a certain threshold. Fortunately, having an RDSP usually doesn’t affect your eligibility for these programs, however if you reside in New Brunswick, PEI, or Quebec, withdrawals from your RDSP could limit access to certain benefits. It’s a good idea to consult a professional to understand how RDSP withdrawals might affect your eligibility, so you can plan accordingly and avoid any surprises.

Contributions to an RDSP

Anyone can contribute to an RDSP, which makes it a flexible way for multiple people to support the beneficiary’s financial future. The lifetime contribution limit  for a single beneficiary is $200,000. There is no limit to how much you contribute each year (within the $200,000 lifetime limit), however timing can be important, as strategic contributions can help you to maximize the government grants available and make the most of the plan’s benefits.

Government Grants and Bonds

Canada Disability Savings Grant (CDSG)

The CDSG is a government program that provides funds to match your own contributions, paying up to $3 for every $1 contributed. Grant eligibility depends on income—family income for child beneficiaries and the beneficiary’s own income for adults, even if they live with their parents. The maximum annual payment for the CDSG is $3,500 and the lifetime limit is $70,000. 

Here’s a chart to illustrate how the CDSG gets calculated: 

Canada Disability Savings Bond (CDSB)

The CDSB is designed to help those with lower incomes give their RDSP an added boost. It provides up to $1,000 annually to a lifetime maximum of $20,000, or to age 49, whichever comes first. Unlike the Grant, you don’t need to contribute to your RDSP in order to qualify for the bond. That’s right, you could literally open an RDSP, contribute nothing, and receive up to $20,000 in bonds.

To take it one step further if you invest the bonds each year and earn an average return of 5%, at the end of 20 years you would have closer to $35,000, and it would have cost you nothing! 

Here is how Bond eligibility is determined: 

Getting Money Out of an RDSP

The main purpose of an RDSP is to provide the beneficiary with a steady, pension-like income starting at age 60. When it comes time to start making withdrawals from our plan, there are two payment types to choose from: Disability Assistance Payments (DAPs) and Lifetime Disability Assistance Payments (LDAPs).

LDAPs are regular payments made to the beneficiary, which can be set up to come monthly, annually, or quarterly, whichever makes the most sense based on the beneficiary’s financial situation.  

DAPs refer to your one-time withdrawals. If you’re making a withdrawal after age 60, and if your RDSP has more of your personal contributions than government contributions, you can take out money without any limits. If your RDSP consists of more government money than your own, you can still request a DAP however your withdrawals will be subject to limitations. 

If you need to make a DAP before turning 60, there may be some limits and even penalties for withdrawing early. It’s important to understand these withdrawal rules to avoid losing money to penalties or having to pay back government grants. While it’s great to manage your own finances, RDSP withdrawals can be tricky, so getting the right help can make a big difference. If you’re interested in learning more about how to take money out of an RDSP, you can find more details here.

Taxation of RDSP Withdrawals

The RDSP (Registered Disability Savings Plan) is made up of four components: personal contributions, government contributions (such as grants and bonds), investment income, and any amounts rolled over from a Registered Education Savings Plan (RESP). When you withdraw from your RDSP, personal contributions aren’t taxed because they’re made with after-tax dollars. However, government contributions, investment income, and rolled-over amounts are considered taxable, but only to the extent that they exceed certain thresholds.

To break this down: there are two key tax credits that come into play — the Basic Personal Amount (BPA) and the Disability Amount (DA). The BPA is a non-refundable tax credit that lets you earn up to a certain amount of income without paying tax on it, and the DA is an additional credit for those who qualify for the Disability Tax Credit (DTC). For 2024, the BPA and DA allow you to earn up to $15,000 and $9,428, respectively, without being taxed. This means no tax is withheld from your RDSP withdrawals until they exceed these combined amounts.

If the beneficiary has other sources of income during the years they are making withdrawals, it’s important to ensure that enough tax is paid or withheld to avoid unexpected tax bills.

One of the great benefits of the RDSP is that its income is generally exempt from most provincial disability and income assistance benefits, so it won’t be clawed back or reduce your disability payments. However, there are a few exceptions to this in New Brunswick, Prince Edward Island, and Quebec, where different rules may apply. It’s important to understand these details so you can fully benefit from your RDSP without risking your access to other much-needed programs and benefits. 

Resources

Understanding the RDSP can be a game-changer for those eligible for the Disability Tax Credit, providing a strategic way to build long-term financial security. To dive deeper into how RDSPs work, including eligibility and setting up an account, visit www.rdsp.com/rdsp-tutorial/

If you have specific questions or need personalized advice on integrating an RDSP into your financial plan, feel free to connect with me HERE.