Category: Federal Funding

Susan is a lovely 2 year old who was diagnosed with Autism and is likely to need full time care for the rest her life. Susan’s parents both work and have a combined net income of $80,000 per year. They have provided well for her, but they don’t have any spare funds available to save for her financial future.

Susan’s grandparents want to step up and contribute to her future. They decide to put into their wills that Susan will receive the majority of their estate. They were quite disappointed to learn that putting money directly into the hands of Susan will trigger a clawback from the government, stopping all her disability payments until her assets are reduced to $5,000. Effectively Susan’s grandparents would be giving their estate to the government.

Susan’s parents suggest a better way. They will open an RDSP and the grandparents will contribute $1,500 per year for 20 years for a total contribution of $30,000.

Question: How much will Susan’s account be worth when she turns 50?

Choose:

1. $255,453
2. $644,478 or
3. $844,927?

Let’s do the math using the online RDSP Calculator

• Susan’s will make three years worth of contributions in the first year. The government has already stipulated that Susan’s disability started at birth.
• Each year from Susan’s birth, a RDSP contribution of $1,500 will attract a $3,500 grant from the government. That’s over $15,000 in her account in the first year of the plan.
• When Susan becomes an adult, the government grants and bonds are calculated using her personal income and not that of her parents. She now becomes eligible for the $1,000 annual bond with no matching contribution.
• Susan’s parents open an account with TD Waterhouse giving them much greater investment options than other institutions. They decide to invest using the Canadian Couch Potato’s portfolio and plan on a conservative rate of return of 5%.

So what will be the account balance when Susan turns 50?

Answer: $844,927

My question to you is: Why would a disabled child’s grandparents hand over their life savings to the government when they could have this kind of impact on their granddaughter’s future?

In 2012 I switched my child’s RDSP from BMO to TD Waterhouse. I was fed up with the limited investment options at BMO and their outrageous pricing.

I decided that my investment choices would follow the recommendations of the Canadian Couch Potato using TD e-Series funds.

How have things worked out so far?  Well, I’m pleased to say that the account has done very well with a rate of return for 2014 of 10.34%.  I don’t think this will repeated every year, but it’s a very good start.

I love the simplicity of the plan.

• I make a contribution once a year
• The government will advise you by letter of the contribution that will attract the maximum grant and bond.
• Wait for the government to add their contribution.
• Re-balance the account to the original asset allocation.
• That’s it.  You are done for the year.

To make the switch refer to my post RDSP – Change of Financial Institution

Disclaimer:  I am not affiliated with any financial institution. I believe you should get the best deal possible, but the prime objective should be to open an RDSP and if you are more comfortable at a different bank, then by all means go there.

Thanks to the Big Cajun Man at the Canadian Personal Finance Blog for the latest update regarding TD Waterhouse.

Holders of an RDSP account can now trade online using WebBroker . Previously we had to conduct all trades over the phone, so this is a big step forward. The complete article can be found here.

For those of you who don’t have other TD accounts, you will still have to deliver a cheque for your RDSP contributions.  For more information about how I handled my child’s RDSP account visit RDSP – Change of Financial Institution.

A rollover of funds from a Registered Retirement Savings Plan (RRSP) to a Registered Disability Savings Plan (RDSP) is another option for estate planning although there are a few limitations that you need to be aware of.

A rollover is an indirect tax-deferred transfer of certain amounts to an RDSP beneficiary’s plan. Rollover amounts must originate from an RRSP, 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:

• Funds from an RRSP willed directly into the hands of the beneficiary are first subject to full taxation before being passed on.
• If the funds are under the direct control of the beneficiary, it will trigger a Persons with Disability (PWD) clawback effectively nullifying the gift.
• 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 the 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 individual’s 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.

Grandparents and other extended family members often try to help their disabled grandkids by leaving them money in their wills. As noble as this is, it may be the worst possible thing to do. As I have mentioned in previous posts, Persons with Disability (PWD) benefits for a disabled adult are clawed back until assets (with some exclusions) are reduced to $5,000. The net result is that the child will have received nothing. This is not a satisfactory situation to say the least. The good news is that with a little planning we can achieve a very different result.

Some solutions include:

• Grandparents leaving the money directly to the child’s parents so they can distribute the money in a fashion which will not trigger the PWD claw back.
• The money can be willed to contribute directly to a Registered Disability Savings Plan (RDSP) for the child. Distributions from an RDSP are exempt from the PWD claw back. One downside is that there is a lifetime maximum contribution limit of $200,000. Additionally, if all the money is contributed in a lump sum, the plan will only receive the matching government grants for that year.
• If the grandparents’ estate has a considerable amount of money for the child, perhaps a trust is in order. To set up a trust (which is exempt from the PWD claw back if constructed properly) a lawyer specializing in trusts should be consulted. A starting point would be to contact PLAN to learn about wills and trusts and get their recommendation for a lawyer.

My personal recommendation (especially for those of us with modest incomes) is for the grandparents to contribute to the child’s RDSP on a yearly basis while they are still alive. Doing this will ensure that:

•     The government grants and bonds are maximized
•     The money is passed to the child in a tax efficient manner
•     The proceeds of the RDSP are exempt from the PWD clawback
•     It ensures that the money will be used for the benefit of the child and no one else
•     Unlike a trust, an RDSP is very easy to set up and manage. Please refer to RDSP.com for more detailed information.

Below I have given an example of how it might work for a Grandparent contributing to an RDSP.

•     Assuming the family income is below approximately $85,000 and above $42,000
•     The child is 4 years when contributions commence
•     The Grandparents contribute $1,500 per year for 20 years for a total contribution of $30,000
•     The funds are invested in a conservative manner earning 5.5% per year
•     The net result is that when the child is 55 years old the account will be worth approximately $1,000,000!

That sounds like a much better result than having the government claw back the entire amount. If your child’s grandparents want to contribute to his/her future in a meaningful way you need to have this talk with them (you might also send them a link to this post).

The Registered Disability Savings Plan (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!

Next, 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.

Grant Bond carry forward

When the 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.

This is the first in a series of posts about the Registered Disability Savings Plan (RDSP).

If you are going to do only one thing for your child’s financial future, setting up an RDSP is it. This easy to setup account invests free government money for his/her future and protects future benefits in a way no other investment can.

Surprisingly the uptake on RDSP is abysmal. Only 14% of those eligible have an RDSP. Why do parents not take the first step to assure the financial future for their child?

I have heard every possible excuse for not starting up an RDSP:

• It’s too hard (Wrong! The paperwork may be lengthy, but grab a coffee and let the financial institution fill it out while you chill. Call ahead and book an appointment with an RDSP specialist)
• It curtails future benefits that my child might receive (Wrong! The BC government has exempted disbursements from the RDSP from clawing back future benefits)
• The investment options are very limited (Partly true, which is why I recommend TD Waterhouse for your account)
• It doesn’t amount to that much money (Wrong! Properly structured the account can amount to well over a million dollars as your child approaches middle age)
• It doesn’t provide the funding I need now (True, but why should that stop you from planning your child’s financial future?)

The Basics

The RDSP is similar to a Registered Education Savings Plan (RESP). A person contributes money to this registered plan, the government adds “free money” and it all accumulates tax free. There is something for everyone here. Families with modest incomes will qualify for a savings bond with no matching contributions. Families with higher incomes will enjoy matching grants within certain limits.

BC has exempted RDSP payouts from clawing back Persons with Disabilities (PWD) benefits further increasing the desirability of this plan.

There should be no excuse not to have a plan set up. Depending on family income the government will add funds through one or both of the following programs:

Canada Disability Savings Grant

When annual family net income is equal to or less than $87,123 the grant will contribute:

•    $3 for every $1 contributed on the first $500.
•    $2 for every $1 contributed on the next $1,000.

When annual net income is over $87,123, the grant will contribute:

•    $1 for every $1 contributed up to $1,000.

The Grant can be received up to a maximum of $70,000 over a person’s lifetime and only until the beneficiary turns 50 years of age.

Canada Disability Savings Bond

When annual net income is $25,584 or less, the Canada Disability Savings Bond will provide $1,000 per year without any personal contribution. The Bond is pro-rated if your income is between $25,584 and $43,953.

The Bond was created to make the RDSP accessible to persons with disabilities whose family and friends are not in a position to make contributions. The Bond can be received up to a maximum of $20,000 over a person’s lifetime and only until the beneficiary turns 50 years of age.

Would you like a $150 gift to kickstart your RDSP?

If you are in receipt of provincial income assistance, you may be eligible for a one time gift of $150. Refer to Endowment 150 for more information.

Which Financial Institution should I use?

TD Waterhouse. If you want to know why, see my previous post RDSP – Change of Financial Institution

As the readers of my site know, I am a big proponent of the Registered Disability Savings Plan (RDSP). It’s a generous savings plan for our disabled children. Depending on your income level and contribution, the government will add up to $4,500 per year to the account which accumulates tax free.

I have held my son’s account with the Bank of Montreal (BMO) since the RDSP was introduced. The staff at the bank have been friendly and the administration has been a piece of cake.

The problem is the investment choices at BMO (typical of most of the banks offering the RDSP) are severely limited. You could invest in:

• A savings account (with minimal interest rates)
• A BMO only GIC (with below market rates)
• BMO mutual funds (with excessive management fees)

None of the above options appealed to me, so I made the move to transfer to TD Waterhouse. The options there are endless including:

• Stocks
• Bonds
• GICs
• Options and
• A wide variety of mutual funds

To open and transfer the account, there was a mountain of paperwork. For the most part, I just sat there and let the staff do all the work and signed the documents at the end. The process however was very straightforward and the staff very helpful. 45 minutes later and we were done.

The transfer takes a few weeks to complete and you will receive a letter with your new account number. It then takes a couple of simple phone calls to set up your WebBroker passwords to view your account online. One of the quirks of this account is that you can’t buy or sell online. You must complete your trades over the phone. This however is easily done.

Personally I believe in simplicity when it comes to investing. I constructed a portfolio based on the advice of the Canadian Couch Potato using his Model Portfolio and the  TD “E” Class funds as shown below.

The cheapest index mutual funds in Canada are TD’s e-Series, but these are only available to investors who open an online account with TD Canada Trust, or through a TD Direct Investing discount brokerage account. The total annual cost of this portfolio is 0.44%:

Canadian equity	20%		TD Canadian Index – e (TDB900)
US equity	20%		TD US Index – e (TDB902)
International equity	20%		TD International Index – e (TDB911)
Canadian bonds	40%		TD Canadian Bond Index – e (TDB909)

The funds are no-load (i.e. there is no cost to buy or sell) and the only caveat is that you must hang onto the funds for at least 90 days to escape penalties. This is no problem for me as I intend to only re-balance the portfolio once a year after my contribution and the government grants have been deposited.