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 firstname.lastname@example.org