RDSP stands for Registered Disability Savings Plan. The RDSP works as a Canadian savings plan similar to the Registered Education Savings Plan (RESP). To be eligible for an RDSP, an individual must qualify for the Disability Tax Credit, and be under the age of 60. The disabled individual who receives the funds invested in the RDSP is called the beneficiary.
Contribution to a disabled individual’s RDSP can be made by anyone with written permission from the plan holder. The plan holder can be the disabled individual (if they are of legal age, and are legally able to enter into a contract), a legal parent, a guardian who the beneficiary has authorized to act on his/her behalf, or a public agency that is legally authorized to act for the beneficiary.
Contributions to the plan can be made until the year in which the beneficiary turns 59. There is an overall lifetime limit of $200,000 on the contributions that can be made to a plan, but there is no annual limit on the amount that can be contributed.
Government Grants & Bonds
A unique feature of the RDSP, and something it has in common with an RESP, is that contributions made are matched by the government of Canada. This comes in the form on the Canada disability savings grants (CDSG) and the Canada disability savings bonds (CDSB). The CDSG and CDSB can received until the year in which the beneficiary turns 49.
The CDSG has a lifetime limit of $70,000. An individual can receive up to $3,500 of matching grants, with a contribution of $1,500. The schedule for matching, for the year 2010, can be found at this CRA link: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rdsp-reei/cdsg-eng.html.
The CDSB has a lifetime limit of $20,000. The bond does not require contributions to be made. The schedule, for the year 2010, can be found at the previously posted link.
Grants and bonds received in any of the ten preceding years of the following events must be repaid to the government:
- the RDSP is voluntarily closed
- the plan is deregistered
- a Disability Assistance Payment (DAP) is made from the plan
- the beneficiary is no longer eligible for the Disability Tax Credit
- the beneficiary dies
Is an RDSP Better than a TFSA or an RRSP?
In some cases, a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP) may be more lucrative than an RDSP. This is due to the fact that individuals receive a tax break when withdrawing from a TFSA and when contributing to an RRSP. There is no such tax break for an RDSP, which instead has the grants and bonds, which the other plans do not.
RDSPs are also more restrictive than TFSAs in when and how you can withdraw the funds within the plan. A reliable financial planner would perform calculations based on the grants, bonds and tax considerations, to see which plan is the most beneficial.
Conclusion
RDSPs are a great alternative for disabled Canadians, although they are not the only option. One must weigh the pros and cons of all savings plans, considering factors such as rate of return and the accessibility of invested funds.
Still, RDSPs are a great option for family members of disabled individuals, who would like to set up a trust for their disabled relative, and the grants and bonds can be lucrative to a low-income taxpayer.