HR Managers should do their homework on the new Registered Disability Savings Plan (RDSP) before discussing RRSPs and TFSAs with disabled employees. Otherwise they may be providing ill advice.
The RDSP is designed to help with long-term savings since a disabled person has a much lower income potential and significantly higher medical expenses than a healthy individual. This financial strain makes retirement savings difficult if not impossible, and in this context the RDSP fills a very important need.
Unveiled in the 2007 budget, the RDSP is currently offered by only two of the five Canadian chartered banks. It has so far flown under the radar compared to the launch of the tax-free savings account (TFSA) since less than 1% of the Canadian population is expected to qualify for it. But for someone who does qualify for the RDSP, this will be a very powerful and attractive savings plan.
Employers should be aware of this new savings vehicle in order to educate disabled employees on how to best direct their savings. This niche offering can provide those with a qualifying disability a significant sum of money as a result of generous grants and bonds from the Canadian government.
To be considered disabled for purposes of opening up an RDSP, one must qualify for the disability tax credit by having a qualified medical practitioner certify a “marked restriction” in physical or mental ability to perform normal daily activities (form T2201 Disability Tax Credit Certificate).
The disability tax credit usually provides tax relief of about $1,500 per annum (combined federal and provincial) depending on income levels, and can be transferred from a dependant or spouse if the disabled individual has insufficient income to utilize the credit themselves. The disabled person can even be a dependant family member such as a sibling, grandparent, uncle/aunt, or niece/nephew who is reliant on the person filing for the tax credit for any of the basic necessities of life.
RDSP accounts consist of contributions by the Plan holder, government grants and bonds, and investment earnings. The main financial benefits of the RDSP are as follows:
• Canada Disability Savings Grant (CDSG);
• Canada Disability Savings Bond (CDSB); and
• Tax sheltered investment earnings.
The only time taxes are ever paid on the RDSP is when money is withdrawn from the Plan. All investment earnings plus the grants and bonds become taxable income when withdrawn. The plan holder’s contributions are always considered after-tax dollars. This makes the RDSP similar to the Registered Education Savings Plan (RESP). The RDSP is also quite similar to the TFSA and RRSP with respect to the tax sheltering of investment earnings feature.
As far as what investment vehicle is most effective for a person with a qualified disability, the RDSP, with its free grant and bond money, is hands down the best vehicle, as the following examples demonstrate.
Example 1 – Family income of $75,769 or less:
CDSG monies are remitted at $3 for every $1 contributed to the RDSP on the first $500 of contributions; plus $2 for every $1 contributed on the next $1,000.
Therefore, a contribution of $1,500 would receive a matching CDSG of $3,500.
Example 2 – Family income of more than $75,769:
CDSG monies are remitted at $1 for every $1 contributed on the first $1,000 of contributions.
Therefore, a contribution of $1,000 would receive a matching CDSG of $1,000.
Example 3 – Family income of less than $21,287:
CDSG monies are remitted at $3 for every $1 contributed to the RDSP on the first $500 of contributions; plus $2 for every $1 contributed on the next $1,000. In addition, a $1,000 CDSB is provided.
Therefore, a contribution of $1,500 would receive a matching CDSG of $3,500 plus $1,000 CDSB or $4,500 in total.
(Note: The CDSB does not require any contributions to the RDSP. Also, the CDSB amount decreases to $0 as family income approaches $37,885.)
Lifetime Maximums
The RDSP program offers a maximum amount of CDSG monies totaling $70,000 and CDSB monies totaling $20,000. Therefore, if maximum contributions are made annually over a 20-year period, the maximum grant and bond monies will be reached. There are no annual limits on the amount that the plan holder contributes to an RDSP, although there is a lifetime limit of $200,000.
Projected RDSP Balances
If a person with a qualifying disability is able to maximize the government subsidies to the RDSP and do a decent job investing the assets, the power of compound interest will provide a very significant nest egg.
If $1,500 of contributions per annum are made over a 20-year period beginning at age 30 for a disabled person, projected RDSP savings by age 60 would be $280,000 for families with earnings less than $21,287, or $230,000 for families with earnings greater than $21,287 (and less than $75,769). This assumes a conservative 4% per annum investment return and produces substantial savings that are unmatched by any other savings vehicle available.
Withdrawals from a RDSP
Payments from the RDSP must start at age 60 and are payable for the lifetime of the Plan holder according to a prescribed formula. As mentioned earlier, the interest, grant, and bond portion of the payments that come out of the RDSP are taxable as regular income. However, payments even though taxable do not count toward income-tested benefits like welfare payments (most provinces), Old Age Security, Guaranteed Income Supplement, and GST rebates. And of course, Canada Pension Plan benefits are always unaffected by income levels.