The government’s Registered Disability Savings Plan (RDSP) is a powerful tool designed to help people with disabilities and their families build a more financially secure future. Over 280,000 Canadians currently have an RDSP, yet far more — over 1.6 million in total — could open one.
That means that over 1.3 million people are missing out on a plan that offers a unique combination of tax advantages and government contributions. An RDSP should be an essential component of financial planning for those with long-term disabilities. However, to maximize the benefits of an RDSP, it's crucial to understand how it works and the common mistakes to avoid.
What is an RDSP?
A Registered Disability Savings Plan allows people with disabilities to save for the long term with significant tax benefits and government contributions. The RDSP is designed to complement other government benefits and income sources, ensuring that the beneficiary (the person with a disability who benefits from the plan) can enjoy a better quality of life.
Contributions to an RDSP grow tax free until they’re withdrawn (this includes interest, dividends and capital gains). Furthermore, the government will help boost the savings in an RDSP by contributing matching grants up to certain amounts, and in some cases by contributing bonds to RDSPs for low- and middle-income beneficiaries. Let’s take a look at the most common RDSP mistakes and how you can avoid them.
Believing you or your child won’t qualify
Some of the most common misconceptions around RDSPs are that they’re only for children, people who are extremely disabled, low-income families or those who don’t work. In reality, eligibility for an RDSP is based on having qualified for the federal Disability Tax Credit.
To qualify for this, you need a diagnosis of a “severe and prolonged impairment in physical or mental functions” and this is not based on age or income level. This impairment can be related to walking, dressing oneself, hearing and seeing, among others; you can read the full list here.
Believing it can lead to social assistance clawbacks
Many people who hesitate to open an RDSP are concerned about social assistance clawbacks. However, in most provinces and territories, RDSPs do not count against social assistance asset limits, and RDSP withdrawals don’t count against social assistance income limits. Even those provinces/territories that place asset and/or income limits against RDSPs usually provide exemptions up to certain amounts.
Therefore, you can usually save and invest in an RDSP without jeopardizing other government benefits you or your loved one may receive.
Overcontributing to an RDSP
While it's tempting to maximize contributions to a Registered Disability Savings Plan, it's important to understand the limits. The government only matches contributions up to a certain amount in any given year, and there is a lifetime limit of $200,000 for contributions.
Contributing more to an RDSP than is needed to maximize that year’s available grants can be a waste of resources, as the excess contributions will not receive government matching above a certain level. Additionally, going over the lifetime limit can result in penalties and tax implications. However, there may still be some cases where you want to make excess contributions (while still keeping to your lifetime contribution limit). Always consult with your IG Advisor to ensure you’re maximizing your contributions.
Ignoring RDSP tax implications
While withdrawals of the original contributions to an RDSP are not taxable, the investment earnings and government grants and bonds are taxable when they’re withdrawn. This can affect the net amount that’s received. Also, you can’t simply ask to “withdraw contributions”; every withdrawal is going to have a taxable and non-taxable component, in proportion to what’s in the RDSP.
It’s therefore important to understand the tax rules and how much is likely to be received from withdrawals, so you can plan accordingly.
Only saving cash in an RDSP
Many people open an RDSP and simply deposit cash, which means they miss out on their investments potentially growing much faster. Like other government registered savings plans, RDSPs allow you to invest in a wide range of options, including:
- Mutual funds
- Stocks (shares)
- Bonds
- Exchange-traded funds (ETFs)
Diversifying your investments helps protect your savings and can also help you achieve much better returns over time, which will improve the financial security of the plan's beneficiary.
Not understanding RDSP contribution requirements
Some people believe that they must make contributions to their RDSP to receive government funds. While you do have to make contributions to receive the Canada Disability Savings Grant, you don’t need to make contributions to receive the Canada Disability Savings Bond.
The bond is available to eligible people with low and average income, regardless of whether they make any contributions. Understanding the difference between the grant and the bond can help you maximize the government's contribution to your RDSP.
Waiting until age 60 to make a withdrawal
While RDSP holders are obliged to start withdrawing from their plan by the end of the year they turn 60, they can make withdrawals earlier. In fact, early withdrawals can often be advisable in certain situations, for example, covering unexpected expenses or funding education.
However, if you received a grant or bond within the 10 years prior to making a withdrawal, you may have to repay some or all of it. It's important to plan your withdrawals strategically, to avoid those penalties.
You should also ensure that withdrawals made before age 60 are recorded as one-time withdrawals and not periodic or systematic “lifetime disability assistance payments” (LDAPs). You’re required to start withdrawing LDAPs at age 60 but if you start LDAPs earlier, you must continue to withdraw a certain amount every year throughout the duration of the RDSP. Don’t lock yourself into unnecessary withdrawals.
Get help getting the most out of an RDSP
As with most investment opportunities, it's essential to have a well-designed financial plan to get the most out of a Registered Disability Savings Plan. An IG Advisor can help you navigate the complexities of the plan, including how to qualify, contribution limits and investment options.
They can also help you develop a strategy that aligns with your long-term financial goals; for example, by balancing contributing to a loved one’s RDSP with saving for your own retirement.
By avoiding these common mistakes and taking full advantage of an RDSP, you can create a more financially stable future for yourself or your loved one. Speak to your IG Advisor today to learn more about how an RDSP can benefit you and your family. If you don't have an IG Advisor, you can find one here.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Advisor.
The Canada Disability Savings Grant (CDSG) and the Canada Disability Savings Bond (CDSB) are provided by the Government of Canada. Eligibility depends on family income levels. Speak to an IG Wealth Management Advisor about special RDSP rules; any redemption may require repayment of the CDSG and CDSB.
