Registered disability savings plans (RDSPs) are essentially retirement savings plans for those with a disability—plans to which the government will contribute—and a lot of people who could use one don’t know about them
By Olev Edur
Steven Williams began investigating registered disability savings plans (RDSPs) six years ago at the request of a family friend whose son had autism. “The family wanted to know whether they should get one for their son,” the Calgary independent financial advisor says. “At the time, I didn’t know much about them, so I said I’d look into the subject.
“Three months later—they’re pretty complicated—I got back to my friend and said, ‘Yes, you must open one,’” Williams says. “I realized that people with disabilities are a very underserved group who really need these retirement savings products, and I decided that this was what I was going to do—I wanted to make sure everyone understands what RDSPs are.”
Williams now devotes all his time to helping clients with disabilities across Canada understand RDSPs. “I’ve been trying to make sure that everyone who qualifies gets one,” he says.
“While I was looking into the RDSP rules, I learned that people with diabetes qualify, and the mother of this autistic boy had diabetes, so she ended up getting one, too,” Williams adds. “The daughter also developed diabetes. Now, in this family of four, three qualify as disabled and the family has three RDSPs.”
How do these plans work, and what are the benefits that have made Williams such a dedicated advocate? “Ultimately they’re retirement plans for people with disabilities,” he explains. “They’re like RRSPs—in that they’re meant to help provide pension income—for disabled persons, but there are many differences.”
One big difference is that you get no tax deduction for RDSP contributions, but those contributions aren’t taxable when withdrawn by the beneficiary—although any growth within the plan is taxable. Only the beneficiary (or the beneficiary’s estate) is entitled to receive payments from the plan; contributors can’t get a refund, although the government can demand repayments of grants or bonds if too much money is withdrawn. A beneficiary can have only one RDSP at a time (although transfers are possible), and an RDSP can have only one beneficiary.
Most important, though, is the fact that you can get the federal government to kick in as much as $90,000 to augment the beneficiary’s retirement income.
There are strings attached, so you need to have a complete picture of how these plans work. To that end, here are some of the basic RDSP rules.
Who’s eligible to have an RDSP?
RDSP beneficiaries must be resident Canadians with a valid Social Insurance Number (SIN) and be eligible for the disability tax credit (DTC) on the federal tax return, meaning that a medical practitioner has certified on Form T2201, Disability Tax Credit Certificate, that this person has a severe and prolonged impairment in physical or mental functions.
Once past the age of majority (and assuming mental competence), a disabled person can open his or her own RDSP. Otherwise, one can be opened on a qualifying beneficiary’s behalf by a parent, spouse or common-law partner, or guardian/trustee. An RDSP can have multiple holders, and the roster can be changed as circumstances warrant. For example, parents can open a plan on behalf of a minor and add the child’s name as holder once he or she reaches the age of majority.
“The plan holder can be the beneficiary, or it can be anyone who is legally able to look after the beneficiary,” Williams says. “It could be an individual or it could be a public agency or institution. In the case of a child who is in the care of the province, for example, it could be the public trustee.”
How much can you contribute?
Unlike RRSPs, there’s no annual limit on contributions to an RDSP, but there is a lifetime limit of $200,000. Anyone can contribute any amount at any time, subject to the approval of the account holder, until the end of the year the beneficiary turns 59, after which no further contributions are permitted.
“Approval is needed because, for example, you don’t want wealthy Uncle Joe saying, ‘I want to help my nephew so I’m going to throw the whole $200,000 in there,’” Williams says. “If that happened, you’d get the grant for only one year. The magic number for a single contribution would be $130,000 to $170,000, so that there’s still room to contribute and get the full benefits for 20 years.”
How much will the government kick in?
There are two components to the government’s contributions to an RDSP:
- The annual Canada disability savings grant (CDSG) is based on the beneficiary’s (or in certain cases, his or her parents’) family income, as well as on contributions to the plan. When income is $90,563 or less (for 2016, indexed to inflation), the grant is 300 per cent of the first $500 (i.e., $1,500 max), plus $2 per dollar on the next $1,000 (i.e., $2,000 max). Thus, on a $1,500 contribution, the maximum grant is $3,500, and the lifetime grant limit is $70,000. If income is higher than $90,563, the grant is limited to 100 per cent on up to $1,000 contributed per year, with a lifetime grant limit of $20,000. Grant payments end the year after the beneficiary turns age 49.
- The annual Canada disability savings bond (CDSB) is based solely on family income at a lower level and no corresponding contributions are required. If annual income is $26,364 or less (for 2016 and indexed), the bond contribution is $1,000 for the year. If income is between $26,364 and $45,282, the bond amount is prorated and disappears when income exceeds $45,282. The lifetime bond maximum is $20,000 and, as with grants, payments stop after age 49.
What’s the catch?
There’s a limit on withdrawals in the form of a “proportional repayment rule”: if withdrawals are made from the plan within 10 years of any CDSG or CDSB payments, then the plan must repay triple the amount withdrawn, up to the “assistance holdback amount,” or AHA (which equals all benefits paid in the 10 preceding years). This holdback amount must be set aside by the RDSP issuer.
So, for example, if the government contributed $3,500 in the year the beneficiary turned 49 and $1,000 were withdrawn from the plan at age 59, $3,000 in grants and bonds would be returned to the government; if $2,000 were withdrawn, up to $6,000 could be forfeit, depending on the extent of the outstanding AHA.
Similarly, the 10-year repayment rule applies if:
- the RDSP is terminated;
- the plan ceases to be an RDSP;
- the beneficiary stops being eligible for the DTC and an election to extend the period for which an RDSP may remain open is not filed by the plan holder;
- a valid election to keep an RDSP open expires; or
- the beneficiary dies.
“The holdback rule is meant to ensure that at age 60, the money is actually used to create a pension for the beneficiary, rather than being spent earlier,” Williams points out. “An RDSP is actually more like a RRIF than an RRSP.”
How is money received from the RDSP?
As noted, only the beneficiary (or his or her estate) can withdraw disability assistance payments (DAPs) from an RDSP. There are no limits on how much can be withdrawn at any time, except where the holdback applies. DAPs are not permitted at all, for example, if they would cause the fair market value of the RDSP to be less than the AHA.
Lifetime disability assistance payments (LDAPs) are structured plans that generate annual income until either the plan is terminated or the beneficiary has died. These payments must begin by the end of the year in which the beneficiary turns 60 and are generally subject to an annual withdrawal limit based on age and other factors. LDAPs may or may not permit additional withdrawals (DAPs) from the plan—you have to ask the issuer about the rules in this regard.
Specified Disability Savings Plans (SDSPs) are geared to those with a shortened life expectancy and permit withdrawals without triggering AHA repayments as long as the yearly withdrawal doesn’t exceed $10,000 (unless the LDAP formula result requires a greater amount to be paid).
However, once this election is made, no more contributions can be made to the plan and the plan will not be entitled to any new grants or bonds. An RDSP can be converted to an SDSP if a medical doctor certifies in writing that the beneficiary of the RDSP is, in his or her professional opinion, unlikely to survive more than five years.
An RDSP becomes a primarily government-assisted plan (PGAP) in any year when the total of all government grant and bond payments made into any of the beneficiary’s RDSPs in the previous years is greater than the total of all private contributions. Generally, in a PGAP year, withdrawals must not exceed the greater of the LDAP formula or 10 per cent of the plan’s fair market value at the beginning of the year.
As for the taxation of RDSP withdrawals, amounts stemming from private contributions aren’t taxable, but everything else—bonds, grants, and all plan growth—is taxed upon withdrawal by the beneficiary. The beneficiary may, however, be able to adjust the amounts attributed to these various sources to optimize the tax impact.
There are numerous other wrinkles to these plans, such as the ability to carry forward grant and bond entitlements to a future year and the ability to transfer other tax-sheltered retirement plans such as RRIFs and registered education savings plans (RESPs) into an RDSP, plus investment and estate considerations.
Because the rules can be quite complicated, if you’re considering an RDSP for yourself or a loved one, you’d be well advised to get some professional guidance before buying. Talk to someone at your financial institution who understands these products.