The Registered Disability Savings Plan is an important tool for Canadians with severe disabilities. These accounts provide long-term financial security for individuals with a severe disability and who qualify for the Disability Tax Credit. This article explains the main benefits of an RDSP and why it is preferable to other government assisted savings vehicles.
The Registered Disability Savings Plan (RDSP) is a government assisted savings vehicle introduced in the 2007 federal budget as response to recommendations by the Expert Panel on Financial Security for Children with Severe Disabilities. The plan is available for individuals that qualify for the Disability Tax Credit (DTC) and is intended to help ensure the financial security of an individual with a severe disability when parents and grandparents are no longer available to provide support. Similar to Registered Education Savings Plans (RESPs), contributions are not tax deductible, but any income generated is tax-sheltered until the funds are withdrawn.
Main Benefits
- Tax-Deferred growth
- Federal government contributions
- Anyone can contribute to the plan
- Provincial disability benefits are not effected
- Outperformance versus other savings vehicles
Tax-Deferred Growth
Since you don’t have to pay taxes on earnings held within the RDSP, your investment compounds untaxed, significantly enhancing long-term growth potential.
Federal Government Contributions
Depending on the family income of the intended beneficiary the federal government will contribute up to $4,500 in Canadian Disability Savings Grants (CDSGs) and Canadian Disability Savings Bonds (CDSBs) per year.1 That’s right, the Federal Government wants to give DTC-eligible individuals money to save for their future needs and more than 400,000 potentially eligible individuals have failed to take advantage of this opportunity.
Provincial Disability Benefits Are Not Effected
RDSPS in Ontario and some other Provinces are exempt as an assist when determining the beneficiary’s eligibility for provincial disability payments, such as the Ontario Disability Support Program (ODSP). The assets held in the RDSP can grow to any amount and you will still be eligible for ODSP assistance.
Anyone Can Make Contributions
Anyone, not just family members of the beneficiary, can make contributions to the plan. This is unique to RDSPS.
There is no annual contribution limit for RDSPs, however there is a lifetime contribution limit of $200,000.
Outperformance versus other savings vehicles – an example
Consider two individuals, Andrew and Braden, both of whom are DTC-eligible.2 Each contributes $1,500 per year to their savings for the next 20 years. Since Andrew has decided to open a RDSP, each year his contributions are matched by $3,500 in CDSGs and $1,000 in CDSBs for a total of $6,000 in annual contributions. Braden has not opened a RDSP and instead contributes to a Tax Free Savings Account (TFSA). At the end of 20 years Andrew’s RDSP will have significantly outperformed Braden’s TFSA. Assuming a conservative average annual return on the investments of 3%, Andrew’s RDSP will have grown to approximately $166,000, while Braden’s TFSA is worth only $41,500 on equal cumulative contributions of $30,000.3
Only 15% of RDSP Individuals Have A Plan
Despite becoming available in 2008, the RDSP remains vastly under-utilized. According to a report by the Senate’s banking committee, only about 15 per cent of 500,000 eligible Canadians have applied for a RDSP to save for their future support needs. If you haven’t yet established a RDSP plan, it’s not too late. In fact, CDSG and CDSB payments accumulate for each year the beneficiary is DTC after 2007.
Conclusion
The Registered Disability Savings Plan is an important tool for Canadians with severe disabilities. These accounts provide long-term financial security for individuals who need it the most.
At Siskinds we understand the complexities of establishing your very own RDSP and will help you navigate through the rules and get you started on the path to long-term financial security. All information included in this article are for educational purposes and are not intended to be relied upon. The suggestions are general and may not be appropriate in your specific circumstances. If you have specific questions about RDSPs, please contact Laura through email at [email protected] or at 877.672.2121