The Registered Disability Savings Plan (RDSP) is a government assisted savings plan available to individuals who qualify for the Disability Tax Credit (DTC) and is intended to help ensure the financial security of an individual with a disability. Federal government contributions may also be available for the RDSP which can make this vehicle an excellent long-term savings tool.
Who can contribute?
Anyone, including the beneficiary, can make contributions to an RDSP with the written permission of the plan holder. Private contributions can be made until the end of the calendar year in which the beneficiary turns 59. Contributions by the federal government through the Canada Disability Savings Bond (CDSB) and Canada Disability Savings Grant (CDSG) can be made until the end of the calendar year in which the beneficiary turns 49. Unused federal bond and grant entitlements can be carried forward for up to ten years.
There is no annual contribution limit for RDSPs, however there is a lifetime contribution limit of $200,000. This lifetime limit includes both federal and private contributions. There is a lifetime limit on federal contributions of $20,000 for CDSBs and $70,000 on CDSGs.
Bond and grant eligibility
The amount of CDSGs a beneficiary can receive is based on the amount of private contributions made into the RDSP as well as on family income. For beneficiaries with a family income greater than $91,831, the maximum annual grant is $1,000. For beneficiaries with a family income of $91,831 or less, the maximum annual grant is $3,500. These amounts are also subject to the lifetime grant limits for CDSGs of $70,000.1
The amount of CDSBs a beneficiary can receive is based solely on family income. For beneficiaries with a family income of $30,000 or less, the beneficiary is entitled to $1000 in bonds. For beneficiaries with a family income between $30,000 and $45,916 the maximum bond amount is based on a formula and will be less than $1000.
No bond is available for beneficiaries whose family income exceeds $45,916. Bond eligibility is subject to the lifetime limit of $20,000.
Benefits to having an RDSP
Due to government contributions, an RDSP has the potential to grow more quickly than other savings vehicles, such as the Tax Free Savings Account. However, aside from the government contributions there are other benefits associated with having an RDSP. Since earnings held within an RDSP are not taxable until the funds are withdrawn from the RDSP, the investment compounds untaxed which enhances long-term growth potential. As well, RDSPs in Ontario are exempt assets when determining whether an individual qualifies for the Ontario Disability Support Program.
Transfers of investments can be made into an RDSP without first selling the investment and converting it into cash. This is known as a transfer in-kind. The contribution will be the market value at the time of the transfer, including an accrued interest for an interest bearing asset.
For tax purposes, the transferor of the asset will have a deemed disposition and will have to pay taxes on any accrued gains. However, an accrued loss is not deductible.
Under certain circumstances, retirement and education savings can be transferred to the RDSP under a tax-deferred rollover. This rollover is available from parents or grandparents on their death to a beneficiary who was financially dependent on the parent or grandparent. However, these rollover contributions will not attract matching CDSGs. Depending on the beneficiary’s family income, they may still receive CDSBs.
There is also the ability to transfer Accumulated Income Payments from a Registered Education Savings Plan (RESP) to an RDSP where the beneficiary is the same for both the RESP and RDSP. The beneficiary must also have a severe and prolonged mental impairment that prevents them from enrolling in a qualifying education program at a post-secondary educational institution. Alternatively, a rollover is available where either the RESP has been open for at least ten years where each beneficiary in the RESP is at least 21 years of age and is not eligible to receive educational assistance payments at the time the rollover is made, or the RESP has been open for at least 35 years.
It is important not to over-contribute to the RDSP. The RDSP will be considered non-compliant when the contributions have exceeded the lifetime contribution limit of $200,000. This may result in the termination of the RDSP or tax penalties.
Annual versus lump-sum contributions
While each individual situation will differ based on family income and beneficiary age, the timing of the contributions to the RDSP can impact on its long-term performance. Beneficiaries with higher family incomes may benefit from the long term tax-deferred growth of a lump sum contribution, while beneficiaries with low family income can maximize the amount of government contributions through contributing annually to the RDSP.
Taking money out of the RDSP
There are two types of payments that can be taken from the RDSP:
- Lifetime Disability Assistance Payments (LDAPs) are regular payments taken out of the RDSP;
- Disability Assistance Payments (DAPs) are one-time payments taken from the RDSP.
Any payment from the RDSP is potentially subject to income tax. Each payment taken from the RDSP is made up of three parts: private contributions, government contributions and investment earnings. Only the portion of the payments that consist of government contributions and investment earnings are taxable.
A beneficiary can receive a payment from the RDSP at any time, subject to certain conditions for repayment of the government contributions and conditions within the Income Tax Act. Additionally, a beneficiary must begin to take regular payments from the RDSP at or before age 60.
Prior to January 1, 2014 all grants and bonds paid into the RDSP in the previous ten years were required to be repaid to the government when:
- Funds were withdrawn from the RDSP;
- The RDSP was deregistered or closed;
- The beneficiary was no longer eligible for the Disability Tax Credit; or
- The beneficiary died.
The ten year amount is known as the Assistance Holdback Amount (“AHA”). A new proportional repayment rule has been introduced to mitigate the impact of the ten-year AHA on beneficiary withdrawals. The proportional repayment rule requires $3 to be repaid to the government for every $1 that is withdrawn, up to the maximum equivalent to the AHA. The proportional repayment rule applies only to withdrawals from the RDSP, the ten-year AHA continues for all other situations referred to above.
How much can I withdraw?
The amount that can be withdrawn from an RDSP depends on a number of factors. If the RDSP contains more government contributions than private contributions, the plan is considered a Primarily Government Assisted Plan. Alternatively, if the plan is primarily funded by private contributions, the plan is considered a non-Primarily Government Assisted Plan. Withdrawal limits are calculated under the Income Tax Act and are calculated differently. The amount that can be withdrawn also depends on whether the withdrawal is a Lifetime Disability Assistance Payment or a Disability Assistance Payment.
For Primarily Government Assisted Plans the withdrawal amount is less than or equal to the greater of: the amount determined by the formula at s. 146.4(4)(l) of the Income Tax Act (the “Formula”) or 10% of the total assets. This is the same for both Lifetime Disability Assistance Payments and Disability Assistance Payments.
For non-Primarily Government Assisted Plans, any amount can be withdrawn as a Disability Assistance Payment. For Lifetime Disability Assistance Payments under this plan, the amount depends on whether the beneficiary has reached age 60. If the beneficiary has reached age 60, the amount that can be withdrawn is an amount greater than or equal to the Formula. If the beneficiary has not reached age 60, there is no minimum withdrawal amount.
Specified Disability Savings Plan
The Specified Disability Savings Plan is designed to give greater flexibility in accessing RDSP savings to beneficiaries with a shortened life expectancy. An election must be filed to designate a plan as an SDSP. Once this has been done, the withdrawal of funds will not trigger either the proportional repayment rule or the AHA. However, no more contributions can be made and the beneficiary will no longer be eligible to receive CDSG or CDSB contributions. As well, payments must start no later than the first calendar year following the year the plan was designated as an SDSP. If the restrictions are not followed, the designation will be removed.
The RDSP is an excellent long term savings options for qualifying individuals. However, it is important to know the rules regarding withdrawals, lifetime contribution limits.
All information included in this article is for educational purposes and is not intended to be relied upon as specific advice. The suggestions are general and may not be appropriate for your specific circumstances.
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.
1 Income thresholds are for 2017 and are adjusted annually