Welcome back fellow challengers. Money is a big factor in becoming independent. Not worrying about how to pay for your next meal or keeping a roof over your head is something everyone needs. The Canadian government in collaboration with PLAN (Planning Lifetime Advocacy Network) has created something to help those dealing with a disability obtain financial freedom. That something is the RDSP.
What is a RDSP?
The RDSP is a registered disability savings plan. Think of it as a cross between a RESP (Registered Education Saving Plan) and a RRSP (Registered Retirement Saving Plan) on steroids. In simple terms an RDSP allows individuals who have a disability to invest money without the government taxing the growth until you withdraw it from the account. I know it doesn’t sound that impressive, but how does getting an guaranteed 300% return on your investment sound. That’s right for every $1 you put in the Canadian government will put in $3 plus some additional $1000 every year for just having an account. If you play your cards right this can lead to $90,000 of free money over the lifetime of the account.
How to I get an RDSP?
In order to be approved for a RDSP you must meet the following 4 requirements.
- Live in Canada
- Have a SIN Card number
- Qualify for the Disability Tax Credit (DTC)
- Need to file taxes for previous 2 years. (note you don’t need this to open an RDSP but you do need this in order to get all the free money)
In order to apply for the DTC you need to fill out a T2201 tax form and send it to the government. Please note that even though you are receiving disability benefits from the government, that does not immediately approve you for the DTC. You can qualify for DTC if you meet both of the following 2 conditions:
- Your mental and physical disabilities are expected to last 1 year or more. Or has lasted 1 year or more.
- One or more of the following applies to you.
- You are blind
- Need extensive therapy or treatment
- You are limited in activities that people need to do regularly for life. (for example: speaking, hearing, walking, using the bathroom, eating, getting dressed, remembering, banking, finding your way around, dealing with emergencies.)
You will also need a medical professional to fill out a portion of the T2201 form. Make sure it is someone that has intimate knowledge of your disability and how it affects you, as well as some familiarity with the T2201 form. If you get rejected for the DTC, it is possible to appeal the decision but the legal process can be difficult. Best to make sure the form is filled out correctly the first time. Once approved you can open an RDSP at pretty much all the major banks in Canada and a few of the credit unions.
What are the rules of an RDSP?
Once you are approved by the government there is no minimum age limit to when you can open an RDSP. An RDSP account can even be opened for a 1 year old. Though, if you are less than 18 years old you will need a parent or guardian to open one on your behalf. The last year you can open an RDSP is in the year you turn 59 years old. There is no maximum annual limit on how much you can contribute to your RDSP, however there is a lifetime limit of $200,000 of private contributions. Private contribution is any money put into the account from yourself, friends or family. You can keep contributing money until the year you turn 60 years old. The government can contribute money to the account up to and including the year you turn 49 years old. Please note this is a hard deadline. If you open the account at 49 years old than you will only get free money for 1 year. It is very important to open an RDSP as soon as possible.
Free Money!
The Canadian government contributes to an RDSP in two methods: Canada Disability Savings Grant (CDSG) and the other is the Canada Disability Savings Bond (CDSB). We will start with the CDSB as it’s the simpler of the two. This is literally free money! Every year the government will deposit up to $1000 into your RDSP account as long as your family adjusted income (FAI) is less than $30,000. If your FAI is more than $45,916 then unfortunately you don’t qualify for the bond. If you are somewhere in the middle then you get a proportionality of the $1000. (Please note $45,916 (This is based on 2018, see link below for current year cutoff) ) Canadian government will contribute a maximum of $20,000 of financial aid as CDSB. I repeat for just having an RDSP the Canadian government will give you $20,000. Now how what is a FAI and how do I figure out how much is mine? FAI is basically the income of the individual with a disability. If the owner of the RDSP is under the age of 18 years old. It will be the total taxable income of the both parents or legal guardian. If the owner of the RDSP is 18 years or older. It will be the total taxable income of the individual.
The second type of government contribution is the CDSG. It is basically the government matching your contributions. The government will match up to a maximum of $70,000. How the money will be given out is also your FAI. If it’s above $90,563: (This is based on 2018, see link below for current year cutoff): For every $1 you put in the government will put in $1 up to a maximum of $1,000. If you want to max out government contributions you need at least $1,000 which will yield a government match of $1,000 If its below $90,563 (This is based on 2018, see link below for current year cutoff) . For the first $500 when you put in $1 the government will match with $3. For the next $1,000 when you put in $1 the government will match with $2. If you want to max out government contributions you need at least $1,500 which will yield a government match of $3,500
Added Bonus
When you first open an RDSP you can also get money retroactively. These are for people who had the disability prior to opening an RDSP. Talk to the Bank or the CRA to see how far back you can claim money. The maximum you can go back is 10 years, these are typically rare cases most commonly they will go back 5 or less. Also the maximum amount of financial aid the government will give in any single year is $10,500. Speak with your bank or CRA to see what is the minimum amount of money you need to deposit in order to maximize your government contributions. When you do withdraw money from you RDSP, the money can be used for anything. There are no strings attached. All money inside the RDSP will not affect any of your benefits or financial aid such disability income, ODSP support, GIS, etc.
When you do take money out you only pay taxes on the growth and the government contributions. Example if you put in $1000 and the government put in $1000 and there was growth of $1000 you would have a total of $3000 in your RDSP. If you withdrew all of it you would only pay tax on $2000 at what ever your marginal tax rate was at the time.
Penalties
Currently there is a 10 year hold back period. So the earliest you can take out money from your RDSP without penalties is 10 years after the last government contribution. It is a steep penalty as for every $1 you take out you must pay the government back $3. So if you take $100 out you have to pay the government back $300. This does not apply to all the government contributions only the contributions made in the last ten years. For example if the government contributed a total of $100 in 2010 and you waited 9 years later and withdrew $200. You only need to pay back the government $100 as the remainder of the money has been left in the RDSP for 10 years. I do not advocate for taking money out of your RDSP except as a last resort.
Challenge
My Challenge to all of you who qualify or are the caregiver of someone who qualifies is to open An RDSP Account. For those over achievers out there please comment below on how to further optimize the system (eg where are best places to open an RDSP, Where to get the lowest MER fee, etc). See you guys back here for the next challenge.
Links:
http://www.rdsp.com/tutorial/all-about-the-rdsp/
https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t2201.html – tax form t2201