Last year my Registered Disability Savings Plan (RDSP) returned 8.2% and had an average rate of return of 7.9% since 2013.
Why is this important and why should you care?
The number of institutions offering the RDSP is rather limited. Many of the banks that do offer the RDSP restrict the allowable investments to in-house products which either have very low yields or very high investment fees.
TD Direct Investing is one of the few banks which allow a self-directed account with few restrictions on the investment options. I’m no investing genius, but I know enough that fees matter. TD e series funds have a very low management fee and I follow the Canadian Couch Potato Balanced Portfolio recommendations.
I’m sure some of you investing geniuses can do much better, but if you are stuck with some lackluster products you may wish to consider this approach.
Read RDSP – Change of Financial Institution to see how I made the change.
Yes, it’s true! The BC government has actually done something positive for a change.
At present, adults who are receiving the Persons with Disability (PWD) pension, are faced with the burden of asset limits. You may remember from previous posts that the government would claw back PWD payments until a person’s total assets fell below $5,000 (with some exclusions).
The net result of PWD claw backs meant that any gifts or inheritances to the disabled individual could result in a net zero financial gain. How frustrating it must have been to gift money to a disabled person only to have the government take back that gift for their own purposes.
Some families were able to dodge the issue by setting up trusts for their children. The downside to trusts is that they can be difficult to set up and administer, putting them out of reach for the average family.
The BC government has now increased the asset limitation to $100,000 ($200,000 for a couple). This means you can gift money to a disabled adult or have them inherit money without the threat of a PWD claw back.
The new asset limit combined with a Registered Disposability Saving Plan (RDSP) which is exempt from the $100,000 limit, means that the vast majority of families will no longer need to worry about setting up a trust.
My hat is off to the BC government for doing the right thing. Now if they could just work on raising the PWD payments from the level that is well below the poverty line…….
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?
- $644,478 or
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?
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.
We discussed in previous posts why the Registered Disability Savings Plan (RDSP) is the best way to save for your child’s future. The key element to the plan is the government grants and bonds (free money!) which is added to the account. The amount added is dependant on the family income.
If the beneficiary of the RDSP is over the age of 18 then the “family net income” used to calculate the government grants/bonds is that of the beneficiary and his/her spouse. The income that will determine the grant and bond is based on the income tax return from the second preceding year. (Example: Contribution made in 2009 – net income based on the taxable year of 2007.)
In other words, to ensure your child receives the maximum entitled grant and bond he/she should file taxes starting at age 17 (even though his income may be low or even non-existent) so that the grant and bond will be based on his/her low income status.
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.