Registered Disability Savings Plans

I’m more of a portfolio manager than a financial planner, so it was only recently that I learned of Flaherty’s little-known legacy for a largely forgotten minority:

The RDSP is a cousin of the Registered Retirement Savings Plan (RRSP) but tweaked to fit the needs of those with physical, developmental and psychiatric disabilities.

Under the program, money can be set aside for a person with a disability (by family or the person him– or herself) and investments accrue tax-free; the RDSP is much like a RRSP, except withdrawals can begin at age 45. For example, the parent of a 15-year-old who puts $200 a month into the plan would provide her with an additional $2,500 a month by age 65. Also, the rules are such that her other income, such as disability benefits, would not be clawed back as a result.

What distinguishes it from a RRSP is that the federal government also makes a contribution, like it does with the Registered Education Savings Plan, but far more generous. Those eligible for a RDSP can get a grant of up to $3,500 a year, and low-income parents can receive an additional Disability Savings Bond of up to $1,000 annually.

The main knock on the program is that it takes a lot of paperwork – which is the reality with any program with eligibility. In this case, a person’s disability has to be so severe that they qualify for a Disability Tax Credit.

The main Revenue Canada web page which has links to Eligibility Requirements:

You can designate an individual as beneficiary if the individual:
•is eligible for the disability tax credit (DTC);
•has a valid social insurance number (SIN);
•is a resident in Canada when the plan is entered into; and
•is under the age of 60 (a plan can be opened for an individual until the end of the year in which they turn 59).The age limit does not apply when a beneficiary’s RDSP is opened as a result of a transfer from the beneficiary’s former RDSP.

… and links to grant information and savings bonds:

An RDSP can get a maximum of $3,500 in matching grants in one year, and up to $70,000 over the beneficiary’s lifetime. A grant can be paid into an RDSP on contributions made to the beneficiary’s RDSP until December 31 of the year the beneficiary turns 49.

The amount of the grant is based on the beneficiary’s family income. The beneficiary family income thresholds are indexed each year to inflation. The income thresholds for 2013 are as follows:

Amount of CDSG grant when family income is $87,123 or less:
•on the first $500 contribution—$3 grant for every dollar contributed, up to $1,500 a year.
•on the next $1,000 contribution—$2 grant for every dollar contributed, up to $2,000 a year.

Amount of CDSG grant when family income is more than $87,123:
•on the first $1,000 contribution—$1 grant for every dollar contributed, up to $1,000.

… and the savings bonds part …

A Canada disability savings bond (bond) is an amount paid by the Government of Canada directly into an RDSP. The Government will pay bonds of up to $1,000 a year to low-income Canadians with disabilities. No contributions have to be made to get the bond. The lifetime bond limit is $20,000. A bond can be paid into an RDSP until the year in which the beneficiary turns 49.

The amount of the bond is based on the beneficiary’s family income. The beneficiary family income thresholds are indexed each year to inflation. The income thresholds for 2013 are as follows:
•$25,356 or less (or if the holder is a public institution), the bond is $1,000;
•between $25,356 and $43,561, part of the $1,000 is based on the formula in the Canada Disability Savings Act;
•more than $43,561, no bond is paid.

This doesn’t really have a lot to do with preferred shares, I agree. But while I don’t consider myself to be a financial planning specialist, I do know more about financial matters than most people … and I’d never heard of this. Right off the top of my head, I knew of two families who might be eligible.

So … I decided this needed some more publicity, and this is it.

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