A Registered Disability Savings Plan (RDSP) is a savings plan that is intended to help parents and others save for the long term financial security of a person who is eligible for the disability tax credit (DTC). If this is for your child, you can only begin making contributions after your child is diagnosed with an eligible disability.
Contributions to an RDSP are not tax deductible and can be made until the end of the year in which the beneficiary turns 59. Contributions that are withdrawn are not included as income to the beneficiary when they are paid out of an RDSP. However, the Canada disability savings grant, the Canada disability savings bond, investment income earned in the plan, and the proceeds from rollover
Should I Use an RDSP?
- You have a child who is eligible for the disability tax credit, and you want to save for their financial future.
NOTE: If your child is disabled but is also likely to attend post-secondary education, some thought should be given to contributing to both an RESP and and RDSP, based on your resources.
Who Can Apply for an RDSP?
You need to speak with a medical practitioner so they can evaluate the individual the RDSP is set up for. There are different eligibility requirements, but some are easier to pinpoint than others.
Physical disabilities are plain to the naked eye, and thus, typically get pushed forward to approval at a faster rate. In Alan’s case, his son is on the autism spectrum so, it was a bit more difficult to prove significant effects on everyday life.
You can also apply for an RDSP on your own behalf as an adult. If you’re diagnosed with a condition that will deteriorate over time, consider setting up an RDSP. If you know this deterioration will affect your projected working life, it’s beneficial to setup your RDSP at the time you’re diagnosed to help you in the long run.
Grants and Taxes
An RDSP provides grants and bonds, which is similar to an RESP. The key difference is that an RDSP can reach up to $90,000 in grants and bonds, which is much more than with an RESP.
Funds contributed are not tax deductible, but the income earned off of your contributions is sheltered from taxes as long as it stays in the RDSP. While you don’t get tax breaks off of the funds contributed, you do get government grants based on the contributor’s income.
Taxing on withdrawals transfer from the contributor to the beneficiary once the beneficiary is 18 years old. Ideally you contribute to the RDSP for 20 years, and let it sit for another ten years for minimal claw backs.
- Government of Canada website explaining RDSPs
- UPDATE: Clarifications from Alan Whitton on RDSPs
- Canajun Finances RDSP page
- Government of Canada website on RDSP Grants and Bonds
- Milburn Drysdale asdfunding.com
- Disability Tax Credit eligibility requirements
Debt Free in 30 podcast with Alan Whitton on RDSPs:
On this week’s podcast we’re welcoming back Alan Whitton, the voice behind the Canadian Personal Finance blog. This is a subject close to Alan as he and his wife found themselves having to set up an RDSP for their son. After familiarizing themselves with the ins and outs of the Disability Tax Credit, they sought help from their doctor to obtain it.