RDSPs
These accounts help build retirement savings for people eligible for the Disability Tax Credit.
A Registered Disability Savings Plan (RDSP) is an account registered with the Canada Revenue Agency (CRA) designed to help create long-term (i.e. retirement) savings for individuals eligible for the Disability Tax Credit.
Opening an RDSP
You can open an advisor-managed RDSP at most financial institutions in Canada. Only a few institutions and brokers offer self-directed RDSPs.
Before opening an RDSP, it is essential to identify both the beneficiary and the holder of the plan. In British Columbia, holders must be at least 19 years old. While the holder and beneficiary are often the same person, beneficiaries who are younger than 19 or are not contractually competent will need a family member or legal representative to act as the holder.
When opening an RDSP:
- Understand what types of investments you can purchase through the account (e.g. mutual funds, ETFs, stocks, bonds).
- Understand if you will have access to other companies’ investment products or only to investment products sold by the company that created your account.
- Compare fees and charges related to the investments you purchase in your account. Examples of fees to consider include trading fees, advisory fees, withdrawal fees, account transfer fees, administration fees, and foreign exchange fees.
- If you do not feel confident investing on your own, or if you do not have time to properly research potential investments, then consider working with a registered investment advisor to align your investments with your financial goals.
- If you feel confident investing on your own and are willing to put in the time to properly research potential investments, then consider a self-directed RDSP. Self-directed accounts may provide access to a broader range of potential investments and at lower cost
Contributing to an RDSP
There is no annual contribution limit for an RDSP, but there is a lifetime limit of $200,000.
Contributions can be made until December 31 of the year the beneficiary turns 49.
RDSPs may be eligible for Canada disability savings grants and bonds, which provide significant additional government support to help grow savings. Consider speaking with an investment advisor to understand how these grants and bonds work and how they can supercharge your contributions.
Withdrawing Funds
RDSPs are intended for long-term savings. Subject to exceptions for reduced life expectancy, funds are generally eligible for withdrawal after 10 years without a contribution. Beneficiaries must start receiving minimum annual payments by the age of 60.
You should consult with your investment advisor or accountant before making any withdrawals, as there may be tax or repayment implications associated with early withdrawals.
Closing an RDSP
RDSPs must be terminated, and all amounts paid out, by December 31 of the year following the first calendar year in which the beneficiary no longer qualifies for the Disability Tax Credit.
If there is a possibility the beneficiary may qualify for the Disability Tax Credit again in the future, you may apply to postpone the closure of the RDSP.
In the event of the beneficiary’s death, the RDSP must be closed, and all amounts paid out by a specified date. Your tax advisor and the CRA can assist with managing the closure of the RDSP.
Advantages of an RDSP
RDSPs offer key benefits, including:
- Government contributions: The Canada disability savings grant matches contributions up to 300%, depending on the beneficiary’s income and contribution amounts. The Canada disability savings bond provides additional contributions for low-income families, even if no deposits are made into the RDSP.
- Tax-deferred growth: Investments within an RDSP grow tax-free, allowing savings to accumulate more efficiently over time.
- No impact on federal benefits: RDSP withdrawals do not affect eligibility for federal income-tested benefits, such as the Guaranteed Income Supplement or Old Age Security.
- Flexibility in contributions: There is no annual contribution limit, allowing for flexibility in saving for the future.
Disadvantages of an RDSP
While RDSPs offer significant advantages, they also come with some drawbacks to consider:
- Complex rules: Strict rules around contributions, withdrawals, and eligibility can be challenging to navigate without careful research or professional advice.
- Clawbacks on early withdrawals: Withdrawing funds too soon may result in the repayment of government contributions received within the last 10 years.
- Eligibility requirements: Only individuals eligible for the Disability Tax Credit can open and maintain an RDSP.
When is it Optimal to Use an RDSP?
- When you start early: Open an RDSP as early as possible to maximize government contributions and benefit from compound growth over time.
- For maximizing government contributions: Make regular contributions to take full advantage of matching grants and bonds, particularly during years when family income is lower.
- For planning long-term needs: Use the RDSP as a tool for future financial security. Withdrawals should ideally align with the beneficiary’s needs in retirement or later life.
- Avoid early withdrawals: Ensure withdrawals occur after the 10-year holding period to prevent the repayment of government contributions.
Questions About RDSPs
For more information, consult your registered investment advisor or visit the CRA website.