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.