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This article was published 6/8/2016 (1108 days ago), so information in it may no longer be current.
The registered disability savings plan — the RDSP — is undeniably an excellent savings vehicle for the long-term wealth of disabled Canadians.
Yet, many involved in the financial industry argue it is poorly understood, and as a result, probably not used as much as it could be.
With that in mind, in second instalment of a Free Press series examining three federally sanctioned, tax-sheltered savings accounts (the other two being the TFSA and RESP), we’ll examine the RDSP’s benefits and the challenges.
First, the plan is designed to help a segment of Canadians who often could use a little financial help.
About one in seven Canadians lives with a disability of some sort. And many are likely disadvantaged economically given they generally earn less (about $10,000 annually on average) and more likely to face difficulty finding employment than other Canadians, according to Statistics Canada.
Moreover, many earn no work income at all. Roughly four in 10 rely wholly on government benefits, pension monies, savings and other non-work-related income to get by.
So a plan allowing people with disabilities to save for the long term — for old age — is a welcome tool.
Certainly its benefits cannot be overlooked. Money grows tax-deferred, and anyone can contribute to the plan on the beneficiary’s behalf, who will presumably at some point withdraw the money with little to no tax owing.
But the best aspect of the RDSP is each dollar contributed attracts a significant amount of grant money from the feds. For every $1 up to $500 contributed annually, a household or individual earning up to $90,563 net annually receives $3 in grant money from the government
On the next $1,000 of contributions, the government kicks in another $2 in grant per dollar of contributions. All told, a disabled individual can qualify for a maximum of $3,500 from the government per year.
Even better, low-income individuals or families with a disabled child can also receive a $1,000 bond regardless of contributions annually.
These traits make the RDSP an important economic tool for disabled Canadians and their families. But many experts also argue the RDSP is too complicated, more so than other registered plans such as an RRSP.
"Even when I talk to clients about it, I pull out the rules because there are tricky aspects," says certified financial planner Doreen Sigurdson with Edmond Financial Group in Winnipeg.
The complications begin at the start: qualifying for the plan. Individuals must first receive the disability tax credit, and it is no slouch either when it comes to complexity.
"It (the credit) requires a medical professional to certify you’re disabled as defined under the Income Tax Act," says Sara Kinnear, director of tax and estate planning at Investors Group.
"That essentially means you have a severe and prolonged impairment that markedly impacts one or more basic activities of daily living."
Problems qualifying for the tax credit often arise for people with mental disabilities or dealing with other health issues that are disabling but not obviously so, she adds. Because their physician must sign off on the forms for the credit, there can be some variability in who might qualify and who doesn’t. In other words, in the eyes of your doc, you may be disabled enough to meet the criteria or you might not — even though you may think you are.
And the challenges involved in qualifying for the credit are likely one reason the take-up on RDSPs isn’t as high as it could be, according to a 2014 parliamentary report. Among the reasons cited is the complexity involved in opening it, including qualifying for the disability credit.
Even Canada’s large financial institutions consider rules surrounding the plan complex.
"There are some challenges individuals and families need to be aware of when considering RDSPs," says David Birkbeck, director of registered plans at RBC.
Beside the tax-credit qualification, "there are restrictive rules regarding ownership," he adds.
Registration requirements are strictly monitored, and minor clerical errors regarding the beneficiaries’ and plan-holders’ (which can be two different people) information could cause a mismatch with CRA records leading to problems.
Additional challenges exist regarding "the ownership and operation of RDSP for an individual who has some limited capacity," Birkbeck says.
These challenges aside, individuals also need to choose how to invest for the long term. Like saving inside an RRSP, this can be daunting because there’s a lot of choice: stocks, bonds, funds, GICs, etc. But the most complex aspect involves withdrawals. Basically, you need to leave it be for a long time or face some stiff penalties.
"It’s key to keep the money in the account for a long time because any money you take out within 10 years after receiving a grant or a bond means the grant or the bond has to be repaid to the government," Sigurdson says.
In special circumstances where the beneficiary’s life expectancy is markedly shortened, amounts can be withdrawn early, but many argue the 10-year blackout should be shortened. In fact, a parliamentary report recommended reducing the period to five years.
Because of the 10-year limit, individuals are best advised waiting until age 60 to use the money. That’s when mandatory withdrawals begin with no concerns about penalties. That’s in part because individuals are only eligible to receive the grant up to age 49, so there’s no danger of withdrawing money at age 60 because that last grant or bond was received at least 11 years prior.
One problem with these age limits, however, is individuals who may face disability in old age are largely left out of the RDSP’s benefit.
That makes some sense given its origins. When envisioned almost a decade ago by then-federal finance minister the late Jim Flaherty, the RDSP aimed to address concerns of parents regarding the long-term financial well-being of their disabled children. (Flaherty himself was the father of a disabled child, so he knew those concerns well.)
But the biggest criticism of the RDSP is with regard to the substantial penalties involved for early withdrawal.
"The amount clawed back is the lesser of three times what you’re withdrawing, or all the grants and bonds for the last 10 years," Kinnear says.
Basically, if you received $10,000 in grants, and the last instalment of those was received within 10 years, you’d be penalized $1,500 on $500 worth of withdrawals.
Then there’s the matter of withdrawing the money once the plan has sat dormant for at least 10 years. Beneficiaries have a couple of options: the disability assistance payment, a one-time payment or the lifetime disability assistance payment. The latter is similar to a registered retirement income fund payment in that it’s consistent year after year.
But the payment formula is more complicated.
Yet, making withdrawals that don’t result in clawbacks from the RDSP are an issue few disabled Canadians have had to deal with because the plan has only been available since 2008. And it likely won’t be one for a few more years if RDSP beneficiaries want to get the most from the plan.
In the meantime, despite its complexities, disabled Canadians are best off contributing enough to receive the maximum grants — or at least get the bond.
And then leave it alone for a very long time.
"The trick with RDSPs is you want to treat them like a long-term investment vehicle," Kinnear says.
"You get the best bang for your buck."