A reader asked me to write about RDSPs. I have always been interested in finding more about how the RDSP works so here is a post on all you need to know about the RDSP in Canada.
This post will go over what an RDSP is, why it is beneficial to sign up for one if you or your dependent qualities, the eligibility criteria for the RDSP, who can contribute, what the RDSP maximum contribution is, and how RDSP withdrawals work.
Table of Contents
What is an RDSP ?
RDSP stands for Registered Disability Savings Plan. The RDSP was created in 2008 by the Canadian government to encourage people with disabilities and their families to save money for their future health care and future cost of living needs.
With an RDSP, you may be eligible to receive up to $90,000 in federal RDSP grants. This is a much larger federal government benefit than the $7200 you can receive for the RESP.
The investments inside the RDSP is tax sheltered. After tax money is used to contribute to the RDSP and withdrawals are taxed (except for contributions).
RDSP Benefits: THE RDSP Grant
There are two main RDSP benefits, the Canada disability savings grant (CDSG) and the Canada disability savings bond (CDSB). The rules for the CDSG and CDSB are more complicated than the RESP.
Canada Disability Savings Grant (CDSG)
The Canada Disability Savings Grant requires contribution. It will match $3, $2, or $1 for every $1 contributed to the RDSP. The amount that the CDSG matches depends on the family’s ANFI (Adjusted Net Family Income). This is similar to the calculation for the Canada Child Benefit… sorta.
If the beneficiary is under 19, then the ANFI is calculated the same was as the Canada Child Benefit.
Once the beneficiary is over 19 then the ANFI is calculated using their income in addition to their spouse.
The CDSG provides up to $3500 annually in grants, and up to $70,000 in total for the RDSP. Grants will continue to be paid out on contributions made before December 31 of the year in which the RDSP beneficiary turns 49.
If the family income is less than $97,069 (2020 numbers), on the first $500 RDSP contribution, the government matches $1500. On the next $1000 contributed, the government matches $2000.
So if you contribute $1500, you can get $3500.
If the AFNI is more than $97,069, it is a 1:1 contribution. On the first $1000, the government matches $1000.
Canada Disability Savings Bond (CDSB)
The Canada Disability Savings Bond is paid out to individuals with disabilities in Canada who have low income. No contributions have to be made to receive this, but you have to have an RDSP open.
The bond is paid out to the RDSP beneficiary until age 49, and the lifetime bond limit is $20,000 (the maximum amount of CDSB that one can receive, is 20 years worth).
For 2020, if your family net income is less than $37,111 you will receive $1000 of the CDSB.
If it is between $31,711 and $48,535, part of $1000 will be paid to the RDSP.
If the income is above $48,535, there is no CDSB paid.
As you can see, the RDSP beneficiary could be eligible for $70,000 in RDSP grants and $20,000 in RDSP bonds, depending on the family net income.
Basically to maximize the RDSP grant received from the federal government, you contribute $1500 per year.
Who Is Eligible To Have an RDSP?
There are a few criteria to meet in order to have an RDSP opened.
The beneficiary should be:
- Under 60 years old
- Have a Social Insurance Number
- Be a resident of Canada when the plan is opened
- And qualify for the DTC or Disability Tax Credit
What is a DTC (Disability Tax Credit)?
The Disability Tax Credit is form T2201.
To be eligible for the Disability Tax Credit, there are a few criteria. The impairment should last for longer than 12 months and be present at least 90% of the time.
The person also must have one of the following:
- Have marked restrictions in one activity of daily living (dressing, eating, walking, toileting (bowel or bladder), speaking, hearing, and performing mental functions necessary for every day life)
- Need life sustaining therapy for at least two times (this is new, previously it was three times) a week for at least 14 hours per week (for example, insulin, or kidney dialysis)
- Have two significant restrictions (less than marked) in two of:
- Getting dressed
- Eating or feeding self
- Bowel and bladder function
- Performing mental functions needed for every day life
In addition, the DTC form has to be completed by a medical practitioner and a box can be checked so that the claim can be done for retroactive years.
To see if the potential RDSP beneficiary is eligible for the DTC, here is a short questionnaire from the government of Canada to answer.
The government may ask for you to reassess your DTC eligibility from time to time.
The DTC in itself can provide a tax credit for the person with a disability (can claim full amount on line 31600).
Or can claim for a dependent, or unused portions can be used as a tax credit for the spouse’s income.
The tax credit is $8,576 for the tax year 2020 with additional $5,003 if the person with the disability is under 18.
Who Can Contribute to an RDSP?
Anyone can contribute to an RDSP for the beneficiary.
This includes the beneficiary’s family and friends.
What is the Maximum Contribution to an RDSP?
There is a maximum lifetime contribution of $200,000. There is no annual limit for contribution.
Though to get the maximum grant annually, which is $3500, you would need a $1500 contribution to the RDSP to receive $3500 (depending on the family income).
Obviously if you contribute $200,000 all at once, you won’t be maximizing the RDSP grant.
You could spread that amount over 20 years or front load it (similar to the RESP strategy) if funds permit, but contributing $171,500 in the first year and then $1500 for 19 years after that. This would optimize compounding and tax sheltered investment growth over 20 years, though realistically it may likely be difficult to come up with $170,000 to invest in the RDSP.
The RDSP rules are complicated, so it can be hard to keep track of how much your RDSP could grow over time with the power of compounding, and how much of the RDSP grant you could qualify for.
The government of Canada has a good RDSP calculator that you can use to calculate future balance of the RDSP with grants, contributions, and compounding.
This post may contain affiliate links. Please see genymoney.ca’s disclaimer for more information.
Where Can You Invest With your RDSP?
The only robo advisor in Canada that offers RDSPs is CI Direct Investing (they used to be known as WealthBar).
Here’s a list of where you can invest your RDSP:
- BMO RDSP
- TD RDSP for example you can do TD Direct Investing
- Scotiabank RDSP
- CIBC RDSP
- RBC RDSP
- Mackenzie RDSP
- CI Direct Investing RDSP (formerly WealthBar) is the only robo advisor in Canada offering the RDSP
Here are some other financial institutions that offer an RDSP according to the government of Canada.
RDSP withdrawals are called Disability Assistance Payments (DAPs).
The withdrawal of the RDSP grant, bond, and investment appreciation are taxable at your marginal rate. The personal contribution part of the RDSP is not taxable (because it was used with after tax dollars).
After age 60, there are regular withdrawals called LDAP which stands for Lifetime Disability Assistance Payments that occur starting at age 60 and end at age 83.
If there is expected shortened life expectancy, of five years or less, and a medical practitioner provides a letter stating this, then the RDSP could be converted to a Specified Disability Savings Plan, but only $10,000 can be withdrawn per year to avoid the penalties.
For more information on the complex rules for RDSP withdrawal, this is a good resource.
Withdrawing from your RDSP does not affect income related federal benefits like the Canada Child Tax Benefit (CCB) or Old Age Security (OAS).
The withdrawal rules for the RDSP are very complicated so I can see why there are fewer DIY investment options available with the RDSP.
The 10 Year Rule
Finally there’s something called the 10 year rule that you have to be aware of, especially when you withdraw. The RDSP is meant to be a super long term savings and investing plan to encourage people with disabilities (and their families) to save for the future. Therefore, they encourage you not to withdraw from your RDSP.
To do this, they created something called the 10 year rule.
The 10 year rule means that if someone receives RDSP grants or RDSP bonds from the government, the beneficiary has to wait 10 years since the last contribution before they can withdraw money from the RDSP account.
Otherwise, a 10 year rule penalty will be applied, which means that any RDSP grant and RDSP bond received from the last ten years of an RDSP withdrawal will have to be paid back.
To avoid the 10 year rule penalty, the RDSP beneficiary will basically have to wait 30 years before accessing and withdrawing from the RDSP to maximize the grants and bonds.
For example, Joe qualifies for the RDSP at age 21 and opens one up. Joe receives the grants and bonds ($90,000 in total) for the next 20 years. Joe has to wait until age 51 to withdraw from the RDSP to avoid having to pay back $45,000 to the Canadian government.
To summarize, the RDSP is a registered account for people with disabilities and their families to be able to save for the future. There are many benefits with the RDSP, including generous government matching and grants, up to $90,000 of free money in a lifetime especially if you are a low income family.
The withdrawal rules for the RDSP are complex, and if you withdraw within 10 years of receiving a grant or bond, a penalty of the last 10 years of grants or bonds received will be applied.
According to Plan Institute, only 38.9% of eligible British Columbians (e.g. under age 60, residents of Canada, and are DTC recipients) have an RDSP in 2017.
There’s a low uptake of the RDSP but it has been increasing in recent years.
If you have an RDSP, do you have any tips on how to maximize your RDSP?
GYM is a 30 something millennial interested in achieving financial freedom through disciplined saving, dividend and ETF investing, and living a minimalist lifestyle. Before you go, check out my recommendations page of financial tools I use to save and invest money. Don’t forget to subscribe for blog updates, a free dividend yield spreadsheet, and the free Young Money Bootcamp eCourse.