Maximizing the Benefit of Saving in an RDSP
The Registered Disability Savings Plan (RDSP) was introduced by the Government of Canada to help families and people with disabilities save for their long-term financial security.
Contributions to an RDSP are not tax-deductible and may include a government grant and bond contribution. There is a lifetime contribution limit of $200,000 per beneficiary and no annual contribution limit. For more details on the RDSP, go to www.rdsp.com.
Here are some age-related strategies that may help you maximize the value of your plan, depending on your circumstances.
When the beneficiary is a young child:
• Make contributions that attract the grant as early as possible, to maximize tax-deferred growth and to minimize the effect of the grant “clawback” — if a withdrawal is made, a portion of grants and bonds received in the previous 10 years will have to be paid back.
• Try to make an annual contribution large enough to attract the maximum matching grant contributions. The earlier you start, the better chance you will have of reaching the maximum grant amount.
• The tax-deferred status of contributions makes the RDSP an ideal way to invest in long-term solutions like a growth oriented mutual fund.
When the beneficiary is a young adult:
• Try to contribute every year because the grant and bond cannot be received following the year the beneficiary turns age 49. Even if there is no intention to contribute, the bond can be maximized simply by opening the plan early enough.
• Upon reaching the age of majority, a beneficiary who is capable of managing his or her own finances can become the holder of his or her own plan. This isn’t compulsory, however. If you are the parent and have been the holder while the beneficiary was a minor, you can continue as holder.
• At this stage, an investment solution that strikes the right balance between growth and safety may make sense depending on when withdrawals are planned.
When the beneficiary is a mature adult (40+):
• Contributions to an RDSP do not qualify for grant contributions following the year the beneficiary turns 49. In addition, plans are not eligible for the bond after this time. But beneficiaries can still benefit from tax-deferred growth by contributing up until the year they turn age 59.
• Lifetime Disability Assistance Payments can begin at any age but must begin by the end of the year in which the beneficiary turns age 60. Consider waiting at least 10 years after the final grant and bond have been received into the plan before requesting LDAPs; otherwise, some of the grant and bond payments received in the previous 10 years will have to be returned to the government.
• The portion of the LDAP consisting of grant, bond and investment income is taxable at the beneficiary’s marginal rate, which may influence the decision to begin payments. For example, if the beneficiary’s marginal tax rate is likely to decrease at retirement age, it may be advantageous to delay LDAPs until that time.
• More conservative investment options, including those that generate regular tax-efficient income while providing some growth to offset inflation, should be considered as payments from the RDSP must begin.
A personal story
“As parents of a 13 year old with a disability, we live in constant anxiety about the overall future of our child. Especially, we are worried about his care and well-being as we become older and less capable in a variety of areas.
As we know, people who are able to independently earn employment income have a variety of options available to them to build some kind of retirement income (i.e. RRSP, pensions, savings, investments, etc.). We are particularly concerned about our son’s ability to have sufficient retirement income due to his disability.
During one of the information sessions organized by PLAN, we were happily surprised to hear about the ‘Registered Disability Savings Plan’ (RDSP). This plan is intended to help parents like us to save for the long-term financial security of our child. Our son could easily have over $300,000 in his RDSP if we contribute $1,500 annually for 20 years, because of government grants and bonds*. We are making this a priority to ensure that our son is financially secure.
We are also working on building his network of friends so that we know that he will be able to enjoy his future without us in it, and be as safe and happy as he can be.
The more we use the tools available to us, the more our anxiety begins to dissipate and excitement takes its place.”