Registered disability savings plans: Why don't more have them?

In the sixyears since registered disability savings plans (RDSPs) first appeared, the number of accounts has been steadily growing, reflecting the potential these plans have to make a huge difference for a population that faces big financial obstaclesespecially in adulthood.

As of the end of December2014,Canadians had opened a total of 99,601RDSP accounts, a 60per cent increasefrom 2012, according to Employment and Social Development Canada.

Still,the number of accounts representsonly about 15per cent of the roughly 643,000 Canadians between the ages of of zero and 59 who areeligible to openan RDSP,showing that the plans are still underused by their main target group disabledindividuals and their families.

These tax-assisted savings plans were the first anywhere in the world designed specifically to provide financial security for people with disabilities.

"There's still a definite lack of awareness," says Joel Crocker, director of planning atthePlanned Lifetime Advocacy Network (PLAN), a Vancouver-based non-profit group that lobbied for the creation ofRDSPs.

"There are also many misconceptions, such as that you need to put money into the plans to get any help from the government."

"There must be a catch," is a familiar comment advocates often hear. So, it comes as a surprise when disabled people learn they can often get thousands of dollars without having to make any contribution to their own plans.

What is an RDSP?

An RDSP is similar to a registered education savings plan (RESP) in that contributions to the plan are not tax deductible, but the income inside the plan is allowed to grow on a tax-sheltered basis until funds are withdrawn.

Contributions are further bolstered by federal grants and savings bonds (more on this government assistance below) that provide up to $4,500 a yearof direct assistance, depending on income up to a lifetime limit of $90,000.

Who is eligible?

Toopen an RDSP, recipients must satisfy three main conditions, namely, they must be:

• Under the age of 60 when contributions are made.
• A Canadianresident with a social insurance number.
• Eligible for the disability tax credit. This ensures that plans can only be set up for those with a serious andongoing physical or mental impairment.

Parents can set up plans for disabled children. Disabled adults can set up plans for themselves. But only one RDSP can be set up per person.

How do they work?

Once someone sets up an RDSP for a particular beneficiary, anyone can contribute money to it as long as the plan holder gives written consent.

"This restriction is important," writes Jamie Golombek in the Canadian Tax Journal, "because it permits the RDSP holder to plan contributions strategically, in order to maximize matching government grants and bonds."

Depending on family income and how much is contributed, Ottawa will provide a grant of up to $3,500 a year. For lower-income Canadians with RDSPs, the federal government adds a bond of up to $1,000 a year, even if no contribution is made that year. These grants and bonds are available until the year the beneficiary turns 49. All grant and bond money must remain in the plan for at least 10 years.

There's no annual limit on how much can be put into a plan, but there is a lifetime contribution limit of $200,000, not counting the grants and bonds. The deadline for contributions each year is Dec. 31.

Parents or grandparents of a disabled child or grandchild can also arrange for a tax-free rollover of RRSP, RRIF or company pension plan money to an RDSP when the parent or grandparent dies.

What are the criteria for grants and bonds?

The grants are called Canada Disability Savings Grants. An RDSP can receive a maximum of $3,500 in matching CDSGs in any one year and a total maximum of $70,000 over the lifetime of the RDSP's beneficiary.

The grant is on a sliding scale. For families with a net income over $89,401(thresholds are inflation-adjusted each year), the grant is equal to the first $1,000 contributed to a maximum of $1,000 a year. But for those with family incomes below $89,401, the grant is sweetened. On the first $500 contributed, Ottawa will contribute $1,500. On the next $1,000, the feds will kick in $2,000. So the maximum grant in any one year can reach $3,500 on a contribution of just $1,500. The lifetime limits for grants is $70,000.

For lower-income Canadians, Ottawa also provides Canada disability savings bonds. For those with family incomes up to $26,021 in 2013, the RDSP will get a $1,000 bond each year, even if nothing is contributed to the recipient's RDSP that year. For incomes between $25,356and $44,701, the grant will be reduced proportionately until it disappears entirely at incomes above $44,701. The lifetime limit for bond payments is $20,000.

For those just opening a plan, Ottawa allows a 10-year carry forward of unused grant and bond entitlements. Since RDSPs have been around since 2008, people can claim unused grant and bond money going back to that year.

A word about family income. For those RDSP beneficiaries under age 18, it's the net income of the child's parents or guardians that is the key figure. For those 18 or over, it's their own family income that is key, even if they still live with their parents.

The bottom line?

All disabled adults, even if they have no income, should apply for the disability tax credit, file tax returns, set up an RDSP and apply for grants and bonds.

The money can really add up. Here's one example provided by PLAN: A low-income family contributes $1,500 a year for 20 years to an RDSP for a total contribution of $30,000. Assuming that the maximum $90,000 of federal grants and bonds are received in those 20 years and the plan is in place for another 10 years (to avoid any repayment issue), an RDSP could grow to be worth between $400,000 and $500,000, assuming a modest return of 4.5 to 5 per cent per year over the 30 years.

Advocates say the plans offer a huge incentive for families to contribute.

How are funds withdrawn from an RDSP?

Several types of withdrawals can be made from an RDSP. Lifetime disability assistance payments (LDAPs) are paid at least once a year until the RDSP is terminated or the beneficiary has died. This payment arrangement, if selected, must begin no later than the end of the year when the plan's beneficiary turns 60. A complicated formula limits the maximum annual LDAP payout. Ottawa now allows an increase in the annual maximum RDSP withdrawal limit, up to 10 per cent of plan savings.

Disability assistance payments can be made from an RDSP at any time, but grants and bonds may need to be repaid if they have not been in the plan for at least 10 years. The 2012 federal budget brought in a proportional repayment rule.Under the new rules,$3 of the grants or bonds paid in the previous 10 years must be repaid for every $1 withdrawn. The old rules required all grants and bonds paid in the prior decade to be repaid.

How do withdrawals affect other benefit payments?

Payments from an RDSP are partially taxable and partially non-taxable.

The portion of the withdrawal derived from grants, bonds and growth is taxable. The part derived from contributions is not taxable.

The really good news is that payments do not reduce the beneficiary's entitlement to any federal income-tested benefit, like the child tax benefit or the federal sales tax credit and the guaranteed income supplement. Furthermore, most provinces and territories have announced a full exemption of RDSP income and assets from provincial income-tested support programs.

How do I set up an RDSP?

Bank of Montreal was the first big bank to establish an RDSP in December 2008. Now, all of the big banks have their own RDSP programs in place. A few credit unions also offer the plans. Each financial institution offers its own investment choices. RDSPs can only be set up at institutions that offer the plans. Be warned that at some smaller branches, staff may have no idea what an RDSP is. You may need to contact a bigger branch.

More information on RDSPs is available fromfinancial institutions,the federal government and various advocacy groups.