Since 2008, the Registered Disability Savings Plan (RDSP) has been available to Canadians who qualify for the disability tax credit and offers a tremendous bonus to those who are eligible.
The RDSP is a savings plan and your contributions are not tax deductible but earning and growth within the plan grow tax-deferred. The lifetime maximum contribution that a disabled individual can invest is $200,000. The government provides generous grants to eligible beneficiaries when contributing into an RDSP plan. RDSP beneficiaries are eligible to receive grants until they reach age 50 and investments remain invested until age 60 in order to maximize benefits and avoid any claw backs.
Contributions can be redeemed at age 60 and afterwards without tax consequences (tax-free, no grant claw backs). Withdrawals of grant and growth after age 60 treated as recipient’s income for tax purposes.
A major benefit of the RDSP is that the funds can be supplemented with Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs) for beneficiaries who are under 50 years old.
CDSGs - are subject to an income test, based on the family's income if the beneficiary is 18 or under, and on the beneficiary's income if older. For any income up to $91,831, the CDSG is equal to 300% of the first $500 contributed, and 200% of the next $1000, giving a maximum annual entitlement of $3500. For those with the higher income, the CDSG is limited to 100% on the first $1000 contributed each year, which still doubles the contribution. Maximum lifetime CDSG grant per beneficiary is $70,000.
CDSBs - are payable without any contributions being required. Again the amount is means tested, with an annual income up to $30,000 qualifying for $1000, a sliding scale between $30,000 and $40,970, and nothing paid if the income is above this. All these income levels are adjusted each year for inflation. Since 2008, the CDSGs and CDSBs can be collected retroactively, based on new contributions in the case of the grant funds. They will ultimately be paid on the basis of the preceding 10 years, but will not be paid for years prior to 2008. The amounts would be based firstly on the highest matching rates, then on the lower rates, and depend on the income test for each year.
Technically, almost anyone can open an RDSP, but only people who are qualified to claim the Disability Tax Credit by the CRA guidelines can be the beneficiary of one.
The account holder can be:
The account holder of the RDSP can authorize anyone to contribute money to an RDSP on behalf of the beneficiary. Once money is contributed it can't be returned.
A beneficiary is only allowed to have one RDSP plan that they're beneficiary of, so it's a requirement for outside sources to contribute money this way.
You can always withdrawal money from your RDSP, but certain circumstances will require a portion of government bonds to be returned. An RDSP was created for long-term savings - a savings account to help support disabled persons if their supports are no longer around to provide needed care.
Generally you can't withdrawal money from an RDSP before age 60 or the government will claw-back grant money. However, there is one situation where you can. If there has been no contributions for the previous 10 years, there will be no claw-back of government benefits. This is known as the '10-year rule'.
Example: If there were contributions to the RDSP until the beneficiary was age 35, that means that age 45 they could withdrawal money from the RDSP without repaying government grants.
It's generally accepted that you have to be age 60 to withdrawal from the RDSP without repaying government grants because the last allowable year you can contribute and receive government grants is age 50.