The Registered Disability Savings Plan is incredibly generous. It is also incredibly complex. Many people will collect $90,000 in government grants and bonds, but the plan’s complexity makes many others hesitate. People tend to avoid purchasing products they don’t understand.
The following are answers to common questions we have been asked over the years.
1. How do you qualify for the RDSP?
The beneficiary of the RDSP (the person with the disability) must be a resident of Canada, must have a valid Social Insurance Number and must be approved for the Disability Tax Credit Certificate.
To apply for the Disability Tax Credit Certificate, an application needs to be completed. You can access the application by clicking here. Part A needs to be completed by the applicant or a representative (e.g. a parent, relative, friend, etc.). Part B needs to be completed by the appropriate medical practitioner
2. How much will the government contribute?
It depends. It depends on family income and the amount of money you contribute. If annual net family income is $93,208 or less*, and you contribute $1,500, you will receive $3,500 of Grant contributions into the RDSP account. If annual net family income is more than $93,208* and you contribute $1,000 to the RDSP, the government will contribute $1,000. Families with lower income can collect more Grant money. For a detailed explanation of how the RDSP Grant is calculated, click here.
If annual net family income is $30,450 or less*, the government will contribute a $1,000 Bond for the year. You are not required to make a contribution to the RDSP to get the Bond. It is for people with low family income. If annual net family income is between $ 30,450 and $46,605* you will receive a prorated amount of the $1,000 Bond. If annual net family income is more than $46,605*, no Bond is received.
For parents who have opened up an RDSP for their child, the Grant and Bond contributions are based on your incomes until the year your child turns 19; then it is based on the child’s income, even if she still lives at home.
3. I just opened an RDSP but I was eligible to open it in 2008. Can I get government Grant and Bond contributions for previous years?
The answer is yes. In fact, when you make a contribution to the RDSP, you are likely accessing government contributions for previous years as this happens automatically. But be careful. If you are eligible for the maximum Grant going all the way back to 2008 (the year the RDSP was first offered), don’t expect to collect all of it in one year. The maximum Grant you can receive in one year is $10,500 and the calculation is not straight-forward. It is very easy to contribute too much to your RDSP, hoping for a big contribution from the government that does not come. To understand how retroactive contributions are calculated, click here.
If any retroactive Bond contributions are owed, they will come automatically. Many clients who opened an RDSP through me this year have received $10,000 in Bond contributions because they were eligible all the way back to 2008.
Unused Grant and Bond entitlements can be accessed going as far back as 10 years.
4. I am on social assistance and there are restrictions on how much money I am allowed to have. Can I have an RDSP and still receive social assistance income?
Yes you can. In Ontario, you are not allowed to have more than $40,000 in assets and receive an income from the Ontario Disability Support Program (ODSP). However, there are exceptions and the RDSP is one of them. You are allowed to be on ODSP or the equivalent in the other provinces and have an RDSP account, regardless of the amount in the RDSP. The RDSP was created as a long-term savings vehicle for people with disabilities, whether they are on social assistance programs or not.
5. How long will it take to collect all the government Grants and Bonds?
It depends on the size of the Grant and Bond contributions which was discussed in the first question. If you collect the maximum Grant and Bond contributions each year and we ignore retroactivity, it will take 20 years to collect all the government contributions: $70,000 in Grants and $20,000 in Bonds.
6. When can I access the money in my RDSP account?
This is where things get a bit complex, but I will try to simplify it. The RDSP was created to promote long-term savings for people with disabilities. So, the government has put penalties in place to discourage people from taking money out of the account prematurely. The rule is a bit of a mouthful, but I will break it down.
If you make a withdrawal, the government will revoke $3.00 for every $1.00 you withdraw to a maximum of what they contributed in the previous 10 years. In other words, if you make a withdrawal the government will see how much it has contributed to your RDSP account in the previous 10 years and for every $1.00 you withdraw, the government will take back $3.00, but they won’t take back more than what they contributed to the account in that 10 year period.
Example. If the government has contributed $45,000 in the previous 10 years and you withdraw $5,000, the government will revoke $15,000 ($3.00 for every $1.00 you have withdrawn). However, if you withdraw $20,000 instead of $5,000, the government will only revoke $45,000. Why? Even though a penalty of $3.00 for every $1.00 equals $60,000 the government only contributed $45,000 in the previous 10 years, so that is the maximum they will revoke.
If you don’t want to incur any penalties, you have to wait 10 years after the very last contribution is made by the government.
7. When will the government make the last contribution to an RDSP account?
The government will stop making contributions once they have contributed $70,000 in Grants and $20,000 in Bonds or the year in which you (the beneficiary of the RDSP) turn 49 years old. Once you are in your 50’s, you can still make personal contributions to the RDSP but the government won’t.
8. Why would I contribute to an RDSP account in my 50’s if the government won’t contribute?
People in their 50’s who receive more money than their social assistance program allows may be able to protect their social assistance payments by depositing the money into their RDSP account. As an example, if a 55 year old person on ODSP receives a $150,000 inheritance that is not structured properly, they may be able to deposit all or part of it into an RDSP to protect their ODSP as discussed in question 4.
9. At what age must I start withdrawing money from my RDSP?
You must start withdrawing money from your RDSP account the year you turn 60 years of age. The minimum amount you must withdraw is based on the Lifetime Disability Assistance Payment formula (LDAP) which is based on life expectancy and the amount of money in the account. The maximum amount you can withdraw in a year is the greater of the LDAP calculation or 10% of the account’s market value on January 1st of the year the withdrawal is made.
10. My child’s life expectancy is short. Does it make sense to open an RDSP since there are such severe withdrawal penalties?
Generally, I would say yes. If you provide the government with evidence that the beneficiary of the RDSP has a life expectancy of five years or less, you can access a portion of the RDSP without penalty. However, you will not be able to contribute anymore money to the RDSP and the government will not make any further contributions.
11. Where can I open an RDSP?
You can open an RDSP at any of the five major banks, some credit unions or through most independent advisors who sell mutual funds.
12. Where is the best place to open an RDSP?
It depends on personal preference and, I would say, on how well you understand how the RDSP works and your knowledge of investing. If you feel you can manage the RDSP account without much help, one of the banks or credit unions could be the right place for you. If you are looking for guidance, I suggest looking for an advisor who understands the RDSP. I know from talking to many people who have gone to the banks, they did not get the guidance they were hoping for. While there are bank employees who understand the RDSP, there are many who do not. I would say it is no real fault of their own. Bank employees are expected to sell and provide service on a vast array of products. It is impossible to be an expert in all products.
Admittedly, I have a personal bias. But what I do know is that it takes an incredible amount of time to understand the RDSP. In the end, I don’t think where you open an RDSP is as important as who opens and manages it for you.
A note about annual net family income. If the beneficiary of an RDSP account (the person with the disability) is a minor, the family income is based on the parents’ collective incomes. Once the beneficiary reaches the year they turn 19 years of age, family income is based on his/her own income, even if they live with their parents. If the beneficiary is married or has a common-law spouse, family income is based on their collective income.
Where the beneficiary of the RDSP is an adult but is supported by his/her parents whose collective net income exceed $93,208 can expect the maximum Grant and Bond contributions from the government, if the beneficiary (the person with the disability) earned less than $30,450 in net income. While the parents make the private contributions to the RDSP, the Grant and Bond contributions are based on the beneficiary’s income (or their income combined with their spouse’s, if they are married or common law) because they are not a minor. As a result, the maximum Grant and Bond contributions are received.
*All income thresholds are 2016 net income figures which are used to determine 2018 RDSP government contributions. Grant and Bond calculations for any given year, use net family income figures from the 2nd year previous to the year in question. To determine 2018 Grant and Bond amounts, net family income from 2016 is used. In 2019, net family income from 2017 will be used. Income thresholds increase each year in accordance with inflation.
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You can contact Ron Malis at email@example.com
My 55 year old boyfriend just learned about the RDSP when doing income tax return. He has a brain injury and is on ODSP. If he establishes an RDSP would he benefit retro back to 2008? I know after age 49 govt contributions stop. But he is just learning now that this exists. Is it worth applying at this point?
Unfortunately, the last year the government will make a contribution to an RDSP is the year the beneficiary (in this case, your boyfriend) turns 49. I have not seen an exception made to this rule. He can still open and RDSP and put his own money in the account, which can help safeguard his ODSP. An RDSP account can be especially useful when dealing with the proceeds of a personal injury settlement, depending on the terms of the settlement.
If you are in your mid 30s and you are eligible for DTC until 2022, does it make sense to open a RDSP? If you are deemed ineligible and must close your account, would the government grant be forfeited anyway?
I would say it depends on a person’s situation. From a pure numbers perspective, it can make sense. If your DTC expires at the end of 2022, you would have to shut down your RDSP by the end of 2024 at the latest. Any Grants and Bond received in the 10 years leading up to the end of 2022 would be returned to the government, BUT the private contributions plus the growth, which includes the growth on the government contributions, would be disbursed to the beneficiary (the person with the disability). So, you can think of the grant and bond contributions as an interest-free investment loan.
However, if your investments lose money, it is possible that the Grant and Bond money paid back to the government will include a portion of the money you or others personally contributed to the account. As well, you have to consider fees that you may need to pay upon redemption.
After you lose the DTC, if your doctor is willing to write a note, stating you are likely to qualify for the DTC in the next 5 years, you can submit that note to your financial institution, which will allow you to keep the RDSP open until the end of 2028. If you secure the DTC during that period, you would not be forced to shut down the account.
As long as you do not have the DTC, you are not supposed to make contributions to the RDSP and you will not receive any government contributions.
Ron, are mutual funds the only option for RDSPs? What about shares, bonds, mics and other investments? Many banks do a very poor job of managing mutual funds.
Legislatively, RDSP can hold many different types of investments, including stocks, bonds, and GICs. However, many financial institutions do not offer the RDSP, at least not yet. The only company I know of that offers stocks in an RDSP is TD.
Does your annual net family income double if you have 2 children with disabilities? How does the RDSP apply to parents dealing with more than 1 child with disabilities?
Entitlement calculations do not change if you have more than one child with a disability. It just means there would be a separate RDSP account for each child. The government would still look at net family income (line 236 on notice of assessment) to determine Grant and Bond entitlements. And the formula to calculation the amount you would need to contribute for the Grant is no different if you have one child or two children with disabilities.
There is one difference that is somewhat related to the RDSP. If you have two children with disabilities and they both have an RDSP account, they would each have been approved for the disability tax credit. So you should be able to apply both tax credits against your taxes.
My mom wants to know whether an RDSP or a Henson’s Trust would be better for her son ( my brother) when she dies. He receiveS Ont. disability payments now and she wants to make sure he doesn’t get penalized when he gets his inheritance thus the RDSP or Henson’s trust.
He is 56 yrs old. I understand with Henson’s trust he is not to receive Over $6000. Yr or his disability is compromised but once he turns 65 he loses his disability but OAS and CPP kick in? And the Henson’s trust is only good for 21 yrs?
With the RDSP she can put his inheritance into it but he can’t draw on it til he turns 60? Is that correct?
With the RDSP he can withdraw more than the $6000.00/yr. without penalty?
Her worry is he will blow his inheritance and not use it wisely.
Figuring out if an RDSP account or a Henson Trust would be better for your brother is a bit more art than science. Inherently, one is not better than the other. They both have their pros and cons, so it really depends on the circumstances you’re trying to address. In fact, it might not be a question of either/or. In many cases, both are used.
But let me point out a couple of things to consider. Your brother is 56. Unless your mom is prepared to open an RDSP account and deposit the money before she passes away, the RDSP may not be an option after she dies. The RDSP account must be opened and all deposits made before December 31st of the year your brother turns 59. If your mother were to pass away after that, the RDSP wouldn’t be an option for any money she left for him.
The $6,000 rule you’re referring to was actually increased to $10,000 a few years ago. Essentially, a person on ODSP is allowed to receive up to $10,000 in the form of gifts and “voluntary payments” in a 12-month period. Money from a Henson Trust is a voluntary payment. There are some exceptions to this rule. This rule does not apply for gifts and voluntary payments used for disability related expenses. There are some other exemptions as well.
Money withdrawn from an RDSP is not subject to this $10,000 rule. ODSP treats money withdrawn from an RDSP much more favorably than most other sources of money. However, this does not mean it is “better” than a Henson Trust.
If your mother is worried your brother would burn through an inheritance, the RDSP would make it much easier for him to do so. He would likely be the account holder at least after your mother passes away. Even if he wasn’t, as the beneficiary of the account, he would have the legal right to withdraw money from the account.
A Henson Trust would help a great deal to protect the money, because a trustee would be the one to manage the assets and not your brother. While the trustee must manage the trust in your brother’s best interest, your brother would not be able to access the funds, directly, and the trustee is not obliged to satisfy requests or demands your brother might make.
To really figure out what is best, your mom might want to seek advice from a professional that has experience with these matters.
I’m a retired male in my mid 50’s with a fairly sizeable net worth. Family income is over $200K and I wonder if it is worth opening an RDSP and funding it with $200K? I realize I am not eligible for the grant so, is there any advantage for me to open the plan?
Good question. The primary benefit would be the tax deferred treatment of investment returns it offers. Similar to an RRSP account, interest, dividends and capital gains are not taxed within an RDSP account. A portion of each withdrawal is taxable, though, which is somewhat better than an RRSP or RRIF account, where the full amouny of a withdrawal is taxable. Figuring out if you should actually move forward with an RDSP account depends on the greater context of your financial situation and other opportunities that may be available to you. I think you would benefit from consulting with a financial professional who has a strong understanding of the RDSP. You can contact our office if you would like to discuss your options further.