RDSP’s gargantuan grants
by Arnold Machel
“Wisdom is better when it’s paired with money, especially if you get both while you’re still living.”
– Ecclesiastes 7:11 (MSG)
I wrote about RDSPs a few years ago, but I feel compelled to write about them again, because so much money is being left on the table that I can hardly bear it. Are you under the age of 49 and living with a disability or do you know someone who fits that description? If you know someone, then give them this article. There is a 75% chance that by doing so you will be giving them an extraordinary gift. A gift that could result in $90,000 over their lifetime; as much as $21,500 this year alone.
At last count, only 24.3 percent of eligible individuals had opened a Registered Disability Savings Plan. This is shocking, given the huge amounts of free money available. RDSPs are complicated vehicles and while I can’t go into all the details in this article, let me touch on some highlights.
RDSPs are purpose-built to be long-term investment vehicles. To be able to use that ‘free’ money, it must sit in the plan for a minimum of 10 years. In fact, the ideal scenario is maximizing contributions over 20 years, waiting 10 and then withdrawing small amounts over the remainder of the person’s life. That’s the best use, but not the only use. In many cases there is money available with no contributions required to take advantage of the plan.
For low income earners, there is up to $11,000 in bonds just waiting to be deposited into a plan as soon as they open it up. That’s all they have to do! Open a plan! Not a penny is required from the beneficiary of the plan to get that money if they are low income. Yes – there’s a bit of paperwork, but all the disabled person needs to do is provide information and sign the application. The institute will do all the heavy lifting. They’ll prepare the documents, submit the grant and bond applications to the appropriate departments and track to make sure the funds arrive properly.
There’s more! There is also a matching grant available if the plan holder does decide to make a deposit. Depending on the income of the beneficiary (or their care provider if the beneficiary is under the age of majority) the matching is 3 for 1, 2 for 1 or 1 for 1. Yes – even high-income earners can get dollar for dollar matching on the first $1,000 contributed into the plan each year.
There are also catch up provisions that will allow multiple years of catch up resulting in up to an additional $10,500 in free money this year (and maybe in future years) depending on the situation. The length of the disability and the income of the beneficiary or their care giver are the determining factors.
I know this sounds repetitive, but with so few plans being opened, the dollars being left on the table are indeed astounding. As mentioned earlier, RDSP rules are complicated, but let’s look at two extremes to give you a sense of how they work. Below are two hypothetical families. Both families have a child born in 2008 with a heart condition making them eligible for the disability tax credit (DTC). Both families weren’t aware of the benefits of the DTC or RDSP until recently, so they only applied this year and the DTC was granted retroactive to birth.
Scenario 1 – high income earning family
Jane’s mom and dad have a combined income of over $200,000 making the plan ineligible for much of the free money available, at least until Jane reaches age 19, when the benefits will all be based on her income, not her family’s. The government will match their contributions dollar for dollar on the first $1,000 contributed. They can retroactively apply for the grant money they’ve missed out on so far (up to 10 years), but matching will be capped at $10,500 per year.
2019 2020 2021
Family contributes: $10,500 $1,500 $1,000
Government matches: $10,500 $1,500 $1,000
Government bond money: $0 $0 $0
Total additions to plan: $21,000 $3,000 $2,000
Scenario 2 – low income family
Alice is a single mom (to Joey) and is barely able to make ends meet. She only makes $30,000 per year. Having had the benefits of the RDSP explained to them, Joey’s extended family have agreed to donate to get some of that free money.
Here’s what can happen over the next few years…
2019 2020 2021
Family contributes: $1,500 $1,500 $1,500
Government matches: $4,500 $4,500 $4,500
Government bond money: $11,000 $1,000 $1,000
Total additions to plan: $17,000 $7,000 $7,000
With both scenarios, there is even more available in future years that can bring the total up to $90,000 coming from the government. In the low-income scenario, family could put in even more in the first few years and accelerate the free government money if they want to. Also, no growth has been factored into the above scenarios. Over time, the growth in these plans is likely to be very significant, ultimately providing a source of income for a disabled individual when their parents have passed on and they need to fund their own living costs.
I can’t stress this enough. Talk to anyone you know who has a disability and ask if they have an RDSP. If they don’t, give them this article and hound them until they get themselves set up. It will be one of the best gifts you will ever give in your entire life.
Arnold Machel, CFP® lives, works and worships in the White Rock/South Surrey area where he attends Gracepoint Community Church. He is a Certified Financial Planner with IPC Investment Corporation and Visionvest Financial Planning & Services. Questions and comments can be directed to him at firstname.lastname@example.org or through his website at www.visionvest.ca. Please note that all comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary may not necessarily reflect those of IPC Investment Corporation. While every attempt is made to ensure accuracy, facts and figures are not guaranteed.