Month: December 2012

A rollover of funds from an RRSP to an RDSP is another option for estate planning although there are a few limitations that you need to be aware of.

Firstly, a rollover is an indirect tax-deferred transfer of certain amounts to an RDSP beneficiary’s plan. Rollover amounts must originate from a Registered Retirement Savings Plan, Registered Retirement Income Fund, or Registered Pension Plan of an RDSP beneficiary’s parent or grandparent. Such amounts may only be rolled over if the RDSP beneficiary was financially dependent upon the parent or grandparent at the time of the parent or grandparent’s death because of a mental or physical infirmity.

Here are some reasons why it makes sense:

• If funds from an RRSP are willed directly into the hands of the beneficiary, the funds are first subject to full taxation before being passed on.
• A direct transfer of funds will trigger a Persons with Disability (PWD) clawback effectively nullifying the transfer.
• A rollover to an RDSP is much easier to administer than a discretionary trust.
• The rollover funds are transferred without triggering taxation. Inside the RDSP, the funds continue to accumulate tax free until funds are withdrawn at which time they are subject to taxation in the hands of the beneficiary.
• In the case of a grandparent this can be an effective way to pass on funds in a tax efficient manner without affecting the individuals Disability Assistance payments.

There are a few limitations that you need to be aware of:

• A rollover is subject to the maximum $200,000 lifetime contribution limit to an RDSP.
• A rollover will not attract a Canada Disability Savings Grant.
• Once the plan has received the maximum contribution limit, no further Canada Savings Grants are possible.

Those of you that have opened an RESP for your child and are now wondering if he/she will ever attend post secondary education may be interested in the following change:

• Effective 2013 any investment income earned in the RESP may be transferred on a tax-deferred basis to an RDSP.

To qualify for the tax-free rollover the beneficiary must meet one of the following conditions:

• The beneficiary has a severe and prolonged mental impairment that can reasonably be expected to prevent the beneficiary from pursuing post-secondary education;
• The RESP has been in existence for at least 10 years and each beneficiary is at least 21 years of age and is not pursuing post-secondary education; or
• The RESP has been in existence for more than 35 years.

How are the funds taxed as a result of the rollover?

• When an RESP rollover occurs, contributions in the RESP will be returned to the RESP subscriber (parent or grandparent) on a tax-free basis. As well, Canada education savings grants and Canada learning bonds in the RESP will be required to be repaid to the government. The investment income will be transferred tax free to the RDSP.

If you have set up an RESP and are considering closing it, there is no longer a rush to make a decision. Any income derived from the account can now be used for the child’s benefit in the RDSP.

Refer to the Budget 2012 Registered Disability Savings Plan (RDSP) for more detailed information.

When the Registered Disability Savings Plan (RDSP) was first introduced, the matching government grants were only given for contributions in that calendar year. That meant that if you missed the Dec 31 deadline, you were out of luck for that year.

Things have now changed. Since 2011, you are now allowed to carry forward unused grant and bond entitlements to future years. The carry forward period can only start after 2007 and lasts for 10 years. Considering the age of your child and the number of years since the disability commenced this can be a significant amount of money. The government will contribute up to $3,500 per year in grants and up to $1,000 in bonds. Refer to my page RDSP for more details.

For those of you who haven’t yet started an RDSP, there is a lot of money on the table and now is the perfect time to set up the account and collect all the government grants and bonds back-dated to 2008. Remember that the child must qualify for the Disability Tax Credit in order to open an RDSP.

A word of caution; don’t use this as an excuse to put off contributions to the RDSP. Firstly you never know when or if the government might change the rules and secondly the earlier you start the more time you have to compound your returns.

If you have not yet educated yourself about the RDSP, please refer to my page RDSP or go to RDSP.com for a more detailed look at the plan.

In my conversations with parents, I have found that disappointingly few parents have opened a Registered Disability Saving Plan (RDSP) for their disabled children. This is troubling because RDSPs are easy to setup and the government is eager to throw free money into the account.

Some of the reasons include:

• Ignorance of the existence of RDSPs
• The mistaken belief that withdrawals from an RDSP will affect the Persons with Disability (PWD) Benefit when their children become adults (Not true in BC)
• The idea that RDSPs are complicated to setup and manage (again not true)
• Some people believe that withdrawals from the RDSP are taxable (Partly true; Contributions are tax free on withdrawal and only the accumulated income and government grants/bonds are taxable). The important thing is that it will be taxed in the hands of the beneficiary, and therefore more likely to receive significantly lower taxation.

An RDSP is an outstanding savings vehicle for your disabled child no matter what your income level. The province of BC has sweetened the pot by exempting RDSP withdrawals from the PWD clawback. The federal government is ready to contribute up to $3,500 per year in grants and up to $1,000 in bonds. In the case of the Disability bond, no contribution is required to receive this amount for low income families.

The RDSP is more than just a long term savings plan. It should also be a key element of your estate planning.

In case you are dismissing the RDSP as irrelevant, please consider two samples scenarios.

Firstly for a low income family opening an RDSP when their child is 4 years old and never contributing a single penny, the account could be worth $239,000 by the time their child is 60 years old!

Consider a middle income family ($37,000 to $85,000) contributing $1,500 per year for 20 years. By the time the individual is 60 years old, the account could be worth $1,300,000!

We are talking about serious money here. The RDSP.com website has an interesting calculator that you can use to see how your contributions and the government funds accumulate tax free to a sizable amount. It’s worth putting in your personal numbers to see what an RDSP can do for your child. Remember the earlier you start, the more time you have for the gains to accumulate.

It’s important to remember that the RDSP is a long term savings plan and will do very little for your short terms needs. There is a rule called the 10 year hold-back. It was slightly modified last year, but the basic idea is that if you take money out of the account within 10 years of receiving a grant or bond, the government will claw their contributions back. Just think of the plan as a long term investment for your child and you will be fine.

For more information regarding the RDSP refer to my page RDSP or for a more detailed source refer to RDSP.com.