Authors: Betty-Anne Howard and Jackie Power, Mackenzie Investments.
In this second installment of our 4 part series – The RDSP Explained – we discuss how and when to make withdrawals from the RDSP and financial planning strategies for Canadians who want to receive disability benefits and tax relief.
Why Demystify The RDSP, or Registered Disability Savings Plan?
Disabilities can create significant financial challenges, including the multitude of barriers society has constructed that interfere with the opportunities the able-bodied population takes for granted. We believe that needs to change!
This blog series aims to provide you with practical and valuable information to help guide you through the savings plan vehicle the government has structured to give you access to financial support. This vehicle is called the Registered Disability Savings Plan – RDSP.
In the last article, we discussed some of the myths and misconceptions surrounding the RDSP, including looking at who is eligible, based on age and whether they are working or not.
We also discussed the Ontario Disability Support Programme (ODSP) and whether someone who is on ODSP is automatically eligible for the Disability Tax Credit.
In this article, we continue to look at some of the myths surrounding the RDSP, focusing on the rules about taking withdrawals from the plan.
Most people are focused on obtaining as much government-supported grant money as possible, which makes perfect sense. Just as with contributions to Registered Retirement Savings Plans (RRSP’s) and Tax-Free Savings Accounts (TFSA’s), there are specific guidelines and requirements when accessing money from an RDSP.
Myth #1 – There’s no point in contributing to an RDSP if our family income is over 95K
Actually, that’s not true at all! For example, depending on your family’s net income, a $1,500 annual deposit into this plan results in $3,500 of grant money deposited into the RDSP. This is with a net yearly family income of less than $95,259. But if your net family income is over that amount, you are still eligible for a $1,000 grant instead of the $3,500 amount.
As you can see, depending on your net family income, you can receive a 66.6% return on your investment (for the lowest amount of grant money – $1000 on a $1500 deposit) up to a 233% return on your investment ($3500 on a $1500 deposit).
Speaking of grant and bond money available through the RDSP, did you know that you could be eligible for a total of $70,000 of grant money over the lifetime of this plan, that is, before you turn 60. And you can carry forward the grant room you have, just like an RESP (Registered Education Savings Plan), under certain conditions, of course.
There is a lot of money available from the government for these plans that will provide the needed financial assistance down the road. We’re emphasizing the incredible amount of government money available to you in this article as most people aren’t aware of these enormous benefits.
It’s important to note that with more grant money in the plan, the greater the restrictions are on the withdrawals, but we still believe that it’s well worth your while to consider setting up an RDSP for any family member who would qualify for this financial assistance.
Myth #2: You have to make contributions in order to receive money
Again, that’s not true! There’s another, often forgotten benefit to setting up an RDSP where no contributions are required into the plan by you. If your family’s annual net income is less than $47,630 you may be eligible to receive a Canada Disability Savings Bond of $1,000 annually to a maximum amount of $20,000!
Imagine, no contributions are required in order to receive this grant money – all you have to do is set up a plan – an RDSP!
Of course, you must also be sure to have your tax returns up to date so the government can verify your income as they need to determine if you qualify for the bond. We have some clients receiving both the grant and bond money into their plans, after they’ve deposited $1,500, given they qualify for both.
Myth #3 – I can withdraw money anytime from my plan with no consequences
Hmm…here’s another myth that is definitely not true, and in order to better understand, we need to have a better grasp on what an RDSP withdrawal actually is.
RDSP withdrawals are called Disability Assistance Payments or DAPs. These payments to you (or withdrawals) can be made at any time; however, if you don’t want to be in a position where you must pay back some of the grant and bond money you’ve received, it’s essential to ensure it’s been 10 years since you last received the grant and/or bond money that was deposited into your RDSP.
Keep in mind that these plans were structured by the government to provide some financial assistance to families with disabilities for long-term financial planning support. Therefore, there are built-in safeguards to, as much as possible, ensure that the money will be used for those purposes.
DAPs CAN be made at any time; however, you may have to pay back some of the government money ($3 for every $1 withdrawn) if you do this within ten years of receiving the “free” money from the government.
Lifetime Disability Assistance Payments (or LDAPs) are a different kind of withdrawal, in that they are a recurring. These payments must start when the beneficiary turns 60. However, these payments can start earlier, and once started, they must continue on an annual basis. There is a formula for calculating those payments, just as there is a formula for calculating Registered Retirement Income Fund (RRIF) payments based on your age and a percentage of the capital amount.
It’s also important to note that when the majority of the money inside an RDSP is made up of private contributions (ie, your own money) instead of contributions from the government (which is rarely the case for obvious reasons) there’s way more flexibility with respect to withdrawals. You can take all the money out in this case, and only the growth on the account is taxed in the hands of the beneficiary.
Your main takeaways about RDSP withdrawals
Hopefully what stands out for you the most about withdrawals are these two factors:
1. Accessing government grants via the RDSP is a worthwhile endeavor especially given the amounts available to you and your family.
2. Having a plan in place regarding both the purpose and intentions for the RDSP withdrawals is imperative.
And, speaking of planning, our next two articles will include more details on disability planning, featuring other guest writers who, as Financial Advisors, have both firsthand experiences personally and professionally.
The 3rd and 4th articles in our series will discuss disability benefits, tax relief, and strategic financial planning.
Stay tuned for parts 3 and 4 coming in September and October 2021!
Read More Of Our Blog Series About the RDSP