18: Registered Disability Savings Plans (RDSPs)
If you have a disability, and a doctor and the federal government agrees that it’s serious enough, you could qualify for the Disability Tax Credit. This episode isn’t about this tax credit, though. It’s about one of the tools that becomes available to you if you qualify for it: the Registered Disability Savings Plan.
Why is this important?
The RDSP is a registered account administered by the federal government, which means that, like an RRSP or a TFSA, it has specific rules about who can open, contribute to, and withdraw from it, and what happens to the money when it’s in the account and when it's taken out.
If you have a disability, this account is designed specifically for you to put money away, grow it tax free, receive grants from the government, and then take the money out in the future without losing any other disability benefits you might be eligible to receive.
Who can open an RDSP? And who owns it?
To open an RDSP (or have one opened on your behalf), you have to be a resident of Canada with a Social Insurance Number, up to date on your taxes, approved for the Disability Tax Credit, and 59 years old or younger.
It’s important to know that every RDSP has a holder and a beneficiary. The beneficiary is you - the person with a disability. The holder might also be you - the person who makes the decisions about how the account is invested and when and how much is withdrawn.
You might also be the holder (but not the beneficiary) if you’re the parent or legal representative of someone with a disability who isn’t able to manage the account on their own, either because they’re a minor, or because it’s beyond their abilities.
Anyone, provided they have permission from the holder, can contribute to an RDSP, but no matter what, the owner of the RDSP, whether they’re an active decision maker or not, whether they’re contributing their own money to the account or not, is always, always, always the person with the disability.
How do RDSPs work when you’re contributing to them?
An RDSP is made up of four distinct pots:
The first pot is the Canada Disability Savings Bond. This is $1,000 per year that the federal government deposits to your RDSP if you are under age 49 and your family income (that’s line 236 on your tax return plus your spouse or common law partner’s line 236) is below $38,237. The most you can get in this pot is $20,000.
The second pot is the money that gets contributed to the account by you, your parents, friends, or literally anyone who you’ve given permission to, up until you reach age 59. The most you can get in this pot is $200,000. Contributions to RDSPs can’t be deducted from your (or anyone else’s) income at tax time.
The third pot is the Canada Disability Savings Grant. This is money that the federal government puts into your account based on your age, how much has been contributed in the previous year, and your family income.
If you’re over 18 and under 49 with a family net income less than $117,045, the federal government gives you $3 for every $1 that’s contributed.
The fourth and final pot of money in your RDSP is the investment income that’s generated by the other three pots of money. You can invest your RDSP in almost anything: a savings account, mutual funds or exchange traded funds, or individual stocks and bonds.
How do RDSPs work when you’re withdrawing from them?
RDSPs have a ten year rule, which simply means that if you withdraw money from your RDSP within ten years of receiving Canada Disability Savings Grants or Bonds, you’ll lose $3 of the grants and bonds you received over that ten years for every $1 you withdraw.
Once you’ve made it past the ten year rule, you can withdraw from your RDSP without having to give back grant and bond money. When you do, you have to pay income tax on the amount you receive from grants, bonds, and investment income, but not on the money contributed (by you or anyone else).
The amount you’re allowed to withdraw depends on how much government money you have in the account compared to contributions and investment income. If there’s more government money, your withdrawals are limited by a formula intended to make sure there’s money left in your RDSP until age 83. If there’s even one dollar of contributions and investment income more than government grants and bonds, that formula doesn’t apply to you, and you can take as much out of the RDSP as you want.
More about Disabilities
If you want to get really deep into your Registered Disability Savings Plan, I highly recommend going through the RDSP Tutorial by Plan Institute, a national non-profit organization that supports people with disabilities and their families.
One last thing: If you have a disability, and can’t get a doctor or the government to recognize it, and therefore can’t get access to any of the benefits available for people with disabilities, I’m sorry.
You’re being forced into artificial poverty as a result of forty years of government austerity, the same forty years that saw record breaking corporate profits, and steadily declining taxes on those profits. It’s violent, and unjust, and you deserve better.