Tag: RDSP

RDSP – Investment Changes

My go-to investment for my son’s Registered Disability Savings Plan (RDSP) has been a mix of TD e-funds. They provided excellent diversification, low cost, and a solid long term track record.

I still believe that the TD e-funds are a great product, but now that the RDSP has grown to a respectable size, it is time for a better product.

VBAL (Vanguard Balanced ETF Portfolio) is a one fund solution that offers:

  • Low cost
  • Outstanding diversification
  • Automatic re-balancing
  • No investment decisions required and
  • The ability to beat 90% of the managed funds over time

No doubt some financial advisors will claim that they can choose better products. RDSP’s generally have a longer investment time span than other accounts. The higher cost of managed accounts has been shown to underperform a low-cost product like VBAL.  Managed funds generally cost the client about 1% in fees to the advisor in addition to very high expenses for the mutual funds.

If you are unsure of how much your fees are really costing you over the long term, check out Larry Bates’s T-Rex Score. It is an easy way to visualize the true costs of your fees. If you haven’t started with a financial advisor yet, assume 1% for his fees and 2% MER for the funds for a total of 3%. Compare this against VBAL with a 0.24% MER. Use a 40-50 year timeframe for the RDSP to see the true impact of the fees.

VBAL is a 60/40 (60% equity, 40% bond) portfolio automatically re-balances when the asset mix shifts. It is an ETF that is bought like a stock, so you will need to have an account at TD Direct Investing. TD allows you to purchase a variety of investment products unlike some institutions that lock you into their in-house, high cost products (I’m looking at you BMO!).

Are you worried about today’s investment climate? Consider this a great time to buy as everything is on sale. My suggestion is to buy VBAL every year with your contributions and the government grants and bonds.

For more information about VBAL read the Canadian Couch Potato’s Model Portfolios.

My 2021 RDSP Report Card

For 2021, my Registered Disability Savings Plan (RDSP) has returned 11.8% and 8.5% over all years since I started tracking in 2013.

Once again, the account has done embarrassingly well. My intent is to demonstrate that anyone without the help of an advisor can easily achieve stellar results with very little effort.

The investments, which have not changed since I opened the account, are a balanced approach using the TD E-Funds and following the Canadian Couch Potato Portfolio.

The Future

The account has now grown large enough to consider simplifying the investments and lowering fees by switching to the ETF VBAL. The overall investment mix will remain about the same but the process will be easier by having a self-balancing, low fee investment product. More about that next time…

A Significant Change To The RDSP

The number one question I get is, “What happens to my Registered Disability Savings Plan (RDSP) if the beneficiary loses the Disability Tax Credit (DTC)?”

For years I did not have a good answer. The account could be frozen for a short period of time but eventually would be closed with the grants and bonds returned to the government.

Now I have a good answer. With effect from Jan 1, 2021 if the beneficiary loses DTC eligibility, the RDSP account will be frozen. No new grants or bonds will be added to the account, but it will not be closed. If the individual regains DTC eligibility, the contributions along with grants and bonds may continue.

What happens if the individual never regains DTC eligibility?

The easy answer: Leave the account alone until the individual turns 60 and then withdraw funds in the same manner as other RDSPs.

The slightly more complicated answer: There is a ten year holdback for all RDSP accounts. This means any withdrawals will involve a clawback of grants and bonds contributed by the government in the past ten years. This reinforced the notion of the RDSP as a long term savings plan.

The loss of DTC eligibility now means that the ten year window now becomes a rolling time period which does not decrease until age 50 when it will decrease by one year until decreasing to zero at age 60.

Once again this means the RDSP is a long term savings plan with very little use in the short to medium term.

What happens if the individual regains DTC eligibility?

The account becomes active. Grants and bonds may be added as before. If the new DTC eligibility includes the period that the account was inactive, grants and bonds will be available for that period.

As with all RDSP accounts the government will send you a “Statement of Grant Entitlement” which you may use to optimize your contributions. RDSP bonds will be automatically added for the inactive period.

This is a great amendment to the RDSP and the government should be applauded for a positive change for those individuals affected by intermittent DTC eligibility.

For more detailed information please visit a good friend of the Autism Community – Big Cajun Man at the Canadian Personal Finance Blog or RDSP.com brought to you by the Plan Institute who were the drivers behind the RDSP development.

RDSP Statement of Grant Entitlement

Soon you will receive your annual Registered Disability Savings Plan (RDSP) Statement of Grant Entitlement in the mail. For those of us too tired to calculate our annual contributions, the government does it for us. Of course this assume that you have an RDSP in the first place. For those of you who do not have an RDSP, I ask why not? Are you new to the world of autism or do you not like receiving free money from the government?

The RDSP letter will show what contribution you need to make to attract the maximum grant and/or bond for 2019.

I love to hate the government, but this really is a nice touch. They are all but begging to give you money.  

You could deposit more money than required to attract the maximum grant, but for most families I recommend limiting their contributions. There is a lifetime maximum contribution limit and once that is filled, there can be no further government grants.  

You can get more information about the RDSP from my website or RDSP.com.

My 2018 RDSP Report Card

Last year, my son’s Registered Disability Savings Plan (RDSP) had a rate of return of -2.2%.

Is that bad?

No, not really. In fact it’s in line with the industry benchmark. My portfolio is based on the Canadian Couch Potato TD e-Series model portfolio . Last year, the model portfolio returned -2.1%.

It’s important to look at the long term picture. We opened the RDSP in 2013. The rate of return from then to the end of 2018 is 5.5%.

And we care because……?

The point is that anyone can manage RDSP investments without paying for a financial advisor or having any investment knowledge. All you have to do is setup a low cost portfolio (such as the one linked above), add money every year, let the government add the grants and bonds and in the long run, you will be well ahead of those who pay too much for financial advice.

My 2017 RDSP Report Card

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.

Want a free $150?

Do you have an Registered Disability Savings Plan (RDSP) for your child? If not, why not? The RDSP is the most generous saving plan for your child’s future.  The federal government is itching to give you free money for your account.  The savvy parents know all about the matching grants and the bonds which can set you on the path to saving over a million dollars for your child’s financial future.

If that is not enough, you can get a free $150 thanks to the support of the Vancouver Foundation. It used to be that this free gift was only available to families with an income under $25,000. In order to encourage the uptake of the fabulous RDSP, they are now making this gift available to any child who:

  • Is under the age of 18,
  • Lives in B.C. and
  • Has an RDSP

For more information and the online application visit the Endowment 150 website.

If you have more than more child with an RDSP, each one is eligible for the Endowment $150 gift.

My RDSP Report Card

The Registered Disability Savings Plan (RDSP) for my child has performed well with a rate of return for 2016 of 5.5% and an average rate of return of 7.8% since 2012.

Why is this important and why should you care?

The RDSP is an incredibly valuable savings plan.  The federal government is ready to give you buckets of free money and you just have to be willing to accept it.

The financial institutions offering the RDSP unfortunately tend to limit the investment options to their “in-house” mutual funds and GICs, which have higher than average management fees.  I want to demonstrate that it is possible to invest wisely given the limited options available even if you have no investment experience.

How did I do it?

In 2012 I switched my child’s Registered Disability Savings Plan (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. For this account I chose the balanced approach.

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 start collecting free money from the government. If you are more comfortable at a different bank, then by all means go there.

Tax Changes for 2015

There are a few minor tax changes for the 2015 tax year that parents with ASD kids need to be aware of. Some of the changes are cosmetic and others may have a more substantial impact on your family finances.

Some of the changes include:

  • The Family Caregiver Amount for children under the age of 18, is now claimed on line 367 of your tax return. This tax credit is $2,093 for 2015.
  • The Fitness Tax Credit used to be a non-refundable tax credit, but starting with the 2015 tax year becomes a refundable tax credit. In essence, this means your tax payable for the year can be reduced below zero. Unlike previous years, you may now claim up to $1,000 and if your child is eligible for the Disability Tax Credit (DTC) and provided you spend at least $100, you may add an additional $500 to the total. If you are using tax software (highly recommended), it will automatically add the $500 as long as it knows your child qualifies for the DTC.
  • The Child Tax Credit (this is the base tax credit for all children) has been replaced with an enhanced Universal Child Care Benefit (UCCB) which gives a new benefit of $720 per year for children ages 6 to 17. It’s important to note that this is taxable, so be ready for a tax bill (or a decreased tax refund).
  • For those of you with disabled teenagers, a gentle reminder that you should file tax returns on their behalf starting for the year that they turn 17 (and every year thereafter). This is vitally important for their Registered Disability Savings Plan (RDSP) grants and bonds when they turn 19. The Canada Revenue Agency (CRA) considers the amount of income 2 years prior to the current tax year to calculate government contributions.
  • The Disability Tax Credit for 2015 is $7,899 and the disability supplement for persons under the age of 18 is $4,607. As in previous years, the supplement may be reduced if someone claimed Child Care or Attendant Care expenses. I strongly suggest that you use tax software for this calculation.
  • There are some changes to the T2201 Disability Tax Credit Certificate and how to claim for previous years. I will be expanding on this subject next week.

My RDSP Report Card

In 2012 I switched my child’s Registered Disability Savings Plan (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. For this account I chose the balanced approach.

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 2015 of 6.1% and an overall average annual return of 9%.

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 start collecting free money from the government. If you are more comfortable at a different bank, then by all means go there.

Welcome News From The BC Government

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…….

The Power Of The RDSP – Part 2

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?

The Power Of The RDSP – Part 1

Joey is a 6 year old boy with autism. His parents applied for the Disability Tax Credit using the T2201 guide (pdf) available on this website. They were very careful with their application and the Canada Revenue Agency (CRA) agreed that Joey had been disabled from birth.

Joey’s parents are in a low income bracket with a taxable income of only $23,000. They worked hard to ensure Joey received the maximum benefit from the B.C. Autism Funding and took advantage of some tax breaks due to Joey’s disability. Having taken care of their son as best they were able, they now became concerned for his financial future after they died. Unfortunately they had no available funds for a Registered Disability Savings Plan (RDSP), but they opened an account anyway.

Question: How much would Joey’s RDSP be worth when he is age 50 if no one made a single contribution to his account?

Choose from:

  1. $45,587
  2. $83,386 or
  3. $147,296

Let’s go through the math using the online RDSP Calculator.

  • The family income is below $25,356 so the government will contribute a $1,000 bond every year with no matching contribution
  • Backdated bonds will be automatically deposited back to 2008 when the RDSP was introduced or when Joey ‘s disability started (according to the CRA)
  • Joey’s parents invest the funds in simple low cost mutual funds using guidance from the Canadian Couch Potato
  • They conservatively estimate that the rate of return will average 5%

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

Answer: $147,296

Not only is that a lot of money, but the proceeds are exempt from clawing back any disability benefits (at least in B.C.) that Joey will be receiving as an adult.

My question to you is: If you haven’t opened an RDSP, what is stopping you?

Could It Happen In B.C.?

There is an outrageous story out of Quebec and Prince Edward Island about the clawback of funds saved by family members for their disabled children. The mean spirited governments in question should hang their heads in shame over what they are doing.

You should read the CBC Story before finishing this post.

The issues in question are about the governments denying disability benefits to individuals even though the savings are invested in a Hensen Trust or a Registered Disability Savings Plan (RDSP). Most provinces (including B.C.) set strict limits on the amount of savings that a person can possess before the government will cease disability payments. The payments resume only after the savings amount falls below the threshold.  In B.C. the limit is $5,000 with some exceptions. The important difference is that in B.C., Hensen Trusts and RDSP payments are generally (with some reasonable exceptions) exempt from triggering clawbacks.

It pains me greatly to say this government did something right, but on this issue they are ahead of many other provinces.  In fact B.C. was the first provincial government to announce after the RDSP launch that they would exempt payments from the plan from causing a clawback.

The answer to the title of this post is unfortunately; Yes this could happen in B.C. The disability benefits are subject to government policy and could change at any time. We must remain vigilant.

My RDSP Report Card

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.

Why Your Autistic Teenager Should File A Tax Return

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.

What To Do With An Unwanted RESP

Some of us opened an RESP for our child only to later realize they will not be attending post secondary education. It’s tempting to simply collapse the RESP but there is now a better option.

For the last couple of years an option to rollover some of the funds from an RESP to an RDSP has existed. To do this one of the following conditions must be met:

  • The individual has a severe and prolonged condition which will prevent him/her from attending post secondary education
  • The RESP itself must be at least 10 years old and the beneficiaries at least 21 years and not pursuing further education or
  • The RESP itself must have been in existence for 35 years

Once one of the above conditions has been met, the rollover will happen as follows:

  • The contributions will be returned to the subscriber (i.e. the parent) on a tax free basis
  • The savings bonds and grants will be returned to the government
  • The investment income will be transferred to the RDSP
  • The transfer will count toward the lifetime contribution limit of the RDSP
  • It will not attract a matching government grant
  • The funds will be taxable on withdrawal from the RDSP in the hands of the beneficiary

What does this mean for you?

  • If you have set up an RESP don’t panic as you are not going to lose your money
  • Don’t be in a rush to collapse the RESP as you may yet find a way to use the account.

RDSP with TD Waterhouse

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.

Rollover Funds From RRSP to RDSP

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.

Estate Planning – The Worst Thing A Grandparent Can Do

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).

Save A Million Bucks (without really trying)

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.

 

The Single Best Investment for your Child

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

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.

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