The Best Kept Personal Finance Secret: RDSPs
If I told you that the government would match your contribution to a long-term savings plan by 300%, would you be interested in learning more? How about 200%? Are you still listening at a 100% match?
For individuals with any sort of disability that affects their daily life (physical or intellectual), a Registered Disability Savings Plan (RDSP) is available to them. An RDSP allows the individual (or parent/guardian) to save for the long-term in a tax-deferred account, but also offers a grant that provides a contribution match of between 300% – 100% based on income level up to certain thresholds. For low income individuals/families, a bond is also available.
Why the need for RDSPs?
The reality is that individuals with disabilities face a number of extra costs including medication, medical supplies, transportation, utilities, accessible housing, support person and adaptive clothing just to name a few. Depending on whether they are able to work or not, an RDSP can help to supplement their income and/or offset some of these costs in the future.
How Much Can RDSPs Provide?
RDSPs can grow to be a substantial amount of savings with the help of the Canada Disability Savings Grant and the Canada Disability Savings Bond and of course, with time and the power of compound interest. Below is a brief summary of what’s available to RDSP holders and beneficiaries.
Canada Disability Savings Grant (CDSG)
If a child’s family or individual’s (over 18) adjusted net annual income is under $93,208, they are eligible for $3,500 in grants/year up to $70,000 in a lifetime with an individual contribution of $1,500/year.
Assuming the maximum contributions of $1500 per year ($125/mo) were made from birth to 20 years old when the grant has reached its maximum, this would amount to over $195K by the age of 30, $308K by 40, $474K by 50 and $690K by 60 when compounded monthly at 4%. All this for an individual contribution of $30,000 ($1500 x 20 years).*
If a child’s family or individual’s (over 18) adjusted net annual income is more than $93,208, they are eligible for $1,000 in grants/year up to $70,000 in a lifetime.
Canada Disability Savings Bond (CDSB)
If a family’s or individual’s (over 18) adjusted net annual income is $30,450 or less, they also qualify for the Canada Disability Savings Bond, which pays $1,000 per year into an RDSP without having to make any contribution themselves. With an income of between $30,450 – $46,605 a portion of the bond is paid. Maximum total bond available is $20,000 in a lifetime.
Based on an annual contribution of a $1,000 bond and no contribution from the beneficiary for 20 years starting at birth, and compounded monthly at 4% that total could grow to over $42K by age 30, $62K by 40, $92K by 50 and $130K by 60.*
The CDSG and CDSB are available to the individual up until the year they turn 49. The RDSP can be left to grow until the age of 60.
*All figures were calculated using the RDSP Savings Calculator
Let’s Spread the Word
RDSPs are grossly underused and I’d like to see that change. While most of us likely know several adults and/or children who would qualify for an RDSP, most of them don’t know RDSPs even exist because they aren’t well advertised by the government like RRSPs, TFSAs or RESPs are. For those who have heard of RDSPs, some may not have the capacity to apply themselves, may feel they don’t have any extra money to contribute and/or don’t understand them enough to know what they are missing out on, which is a lot. Furthermore, the application process can be overwhelming, which I believe is one of the deterrents for people.
In addition, many financial advisors aren’t familiar with RDSPs and/or simply don’t have an interest in promoting them, as it can be a long process and often requires a lot of extra time on the part of the advisor. This is not the case for me. I have always offered RDSPs as part of my portfolio of products because if you know me well, you know how much I enjoy helping people. My goal has always been to educate my clients on the power RDSPs have to grow substantial savings, even with just a modest amount of contributions on their part, together with the grant. As with all investments, the key is time to allow compound interest to work it’s magic.
So, help me spread the word. Tell your friends who might qualify themselves or whose children might qualify or simply share this blog. Any Canadian citizen with a Social Insurance Number (SIN) who has a physical or intellectual disability and qualifies for the Disability Tax Credit (DTC) can apply for the RDSP. I’m very familiar with RDSPs and have helped many clients navigate the application process. I’m happy to answer questions and provide any help I can. You can reach me here and you can learn more about RDSPs here.