What Is A Registered Disability Savings Plan?

What is an RDSP?

An RDSP, or Registered Disability Savings Plan is a special kind of savings account designed specifically to help those with mental or physical disabilities secure their financial future.

Here’s how it works: you, your family, or friends can contribute money to this account, and as an added bonus, the Canadian government will pitch in too! They add extra funds through grants and bonds, which means the money in the RDSP can grow much faster than in a regular savings account.

This plan is a great way to save for the future, especially since the investment income earned in the RDSP won’t be taxed until the money is withdrawn. And, usually, that’s not until much later, giving the savings plenty of time to grow.

Plus, having an RDSP usually doesn’t affect your eligibility for other disability benefits, so it’s a win-win way to plan for the future.

How does an RDSP work?

There are some important terms to understand when it comes to RDSPs. This savings account is opened by what the CRA calls a “plan holder.” This is the person who starts and manages the RDSP.

People who deposit money into the RDSP are called “contributors.” The CRA allows anyone to contribute to an RDSP (even agencies and institutions) as long as they have written permission from the plan holder.

Though an RDSP beneficiary must be Canadian, a contributor doesn’t have to be. A plan holder also doesn’t need to be a Canadian resident, but they do need a Canadian Social Insurance Number (SIN) or a business number, depending on whether they are an individual or an institution.

The beneficiary can also open an RDSP, if they have reached the age of majority and are able to legally enter into a contract. However, it may be more likely that someone else opens the RDSP on the beneficiary’s behalf. This includes legal parents, guardians, or an individual legally authorized to act on the beneficiary’s behalf.

Payments from an RDSP can only be paid to the beneficiary or the beneficiary’s estate.

Plan holders may continue managing the plan after the beneficiary reaches the age of majority. Once the beneficiary has reached this age and can legally enter a contract, the beneficiary may be added as a joint holder. If the beneficiary cannot act for themselves, a qualifying family member may do so on their behalf.

Who can be an RDSP beneficiary in Canada?

In Canada, an RDSP beneficiary is a person who has a long-term disability and is eligible for the disability tax credit. Determining qualification for the DTC requires Form T2201 – Disability Tax Credit Certificate to be completed by a medical practitioner who provides details of the physical or mental impairment and how it limits day-to-day activities.

This form must then be sent to and approved by the CRA. The beneficiary of an RDSP must be a Canadian resident with a valid SIN at the time the plan is opened and when each contribution is made.

What is the benefit of an RDSP?

The benefit of an RDSP is that it’s a way to save money where the government steps up to help through the Canada Disability Savings Grant and the Canada Disability Savings Bond. It’s a real game-changer for Canadians with disabilities. Here’s the deal: for every contribution made, the RDSP grant can add up to $3 for every $1 put in, up to $3,500 a year. That’s a huge boost!

For people with lower incomes who may not be able to contribute to the RDSP, the Canada Disability Savings Bond can put up to $1,000 a year into the RDSP without a deposit from a contributor. These features can add up to a lot over time, providing a solid financial cushion for the future. Plus, the money grows tax-free until it’s taken out.

The RDSP contribution limit is $200,000 over the life of the plan. But there is no yearly limit, so you can save at your own pace. Contributions to an RDSP can be made until the end of the year in which the beneficiary turns 59.

Are RDSPs tax deductible?

No, an RDSP is not tax deductible, because contributions to an RDSP are made by depositing money that’s already been taxed.

An RDSP differs from a registered retirement plan in that RDSP contributions are made with after-tax dollars, so contributions are not tax deductible. Contributions that are later withdrawn from the RDSP are not considered income for the beneficiary; however, the grants and bonds received, as well as investment income earned by the RDSP, is considered income and will be taxed.

Can I withdraw a lump sum from RDSP?

As long as your financial institution allows single payments, yes, an RDSP withdrawal can be in the form of a lump sum from your plan. Depending on your circumstances, some lump-sum withdrawals may impact the disability benefits you are receiving. So always check with your provincial government to understand how this decision might impact your situation.

When can I withdraw from an RDSP without penalty?

You can withdraw money from an RDSP without penalty 10 years after the last government grant or bond has been deposited into the account. This rule ensures that the plan is used for long-term savings.

If you withdraw funds before this 10-year period, you’ll have to repay some or all of the government contributions. After this period, withdrawals can be made with more flexibility, allowing you to use your money as needed without incurring penalties.

Financial institutions have different RDSP withdrawal rules, so it’s best to contact your bank. If you’ve received a grant or bond within the last 10 years, you will have to repay some or all of that money.

The RDSP is a unique savings option in Canada for people with disabilities, offering significant government contributions through grants and bonds and flexible, tax-free savings growth.