One of the most troubling questions facing families who have a disabled member is how those loved ones will be able to live once their parents, or other family members, pass on.
Just recently, Canada became the first country in the world to develop a program that gives families a way to provide for the future financial security of their loved ones with disabilities.
The Registered Disability Savings Plan (RDSP) was originally introduced in the 2007 federal budget and started to become available at financial institutions late last year. Over time, the RDSP is expected to help an estimated 500,000 disabled Canadians and their families plan for and create a more comfortable and secure future.
Any individual who is eligible for the Disability Tax Credit, is a resident of Canada, under the age of 60 and has a social insurance number can establish an RDSP. In the case of a minor child, a parent or guardian can establish and direct the plan.
An RDSP works much like a Registered Education Savings Plan (RESP).
Money invested in the plan is allowed to grow tax-free until it is withdrawn. There is a $200,000 lifetime contribution limit but no limit on annual contributions.
Contributions can be made by the individual, any family member or friends and there are no restrictions on when the funds can be used and for what purpose, as long it is for the beneficiaries benefit.
The program also provides grants and bonds for lower income families, based on the family’s net income.
Upon withdrawal, the income, the grant and the bond are taxed in the hands of the beneficiary, usually at a lower rate.
The RDSP grant is designed for families in lower to middle income tax brackets and includes a federal contribution.
When the annual net income is less than $75,769, the grant will contribute $3 for every $1 contributed on the first $500 and $2 for every $1 contributed on the next $1,000. When the annual net income is more than $75,769, the grant contributes $1 for every $1 contributed to a maximum of $70,000, or until the year in which the beneficiary turns 50.
When annual net income is $21,287 or less, the bond provides $1,000 a year without any contribution, meaning the RDSP becomes accessible to people with disabilities whose family doesn’t have the money to make any contributions. The bond can be received for up to $20,000 or until the person turns 50.
The plan’s beneficiary can receive payments as soon as it is established, but any grant or bond received within 10 years must be repaid.
Each dollar that is withdrawn from an RDSP is considered to be made up of a contribution, grant or bond, and income. The proportion that is a grant, bond or income is taxable.
“RDSPs are designed to help Canadians with disabilities and their families ensure long-term financial security,” says David Birkbeck, head of registered products strategy at RBC.
BMO Financial Group and RBC were the first two major Canadian banks to offer RDSPs. In the next year, up to 16 financial institutions are expected to offer the plans.
RDSP contributions need to be made by December 31 in order to attract the bonds and grants for the year.
One important difference between the RDSP and the more familiar Registered Retirement Savings Plan (RRSP) is that there can only be one RDSP plan per beneficiary while one individual may hold multiple RRSPs.
Another important aspect of the RDSP program is that it gives financial support to disabled Canadians without undermining other government support benefits.
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors. He can be contacted at boggsyourmoney@rogers.com.