RDSP Explained – Everything You Need To Know About The Registered Disability Savings Plan

The RDSP – or Registered Disability Savings Plan – is a Canadian registered investment account created by the Canadian government in 2008 to help people with disabilities gain financial security for retirement. 

Even though it was created over 15 years ago, less than one third of people eligible for an RDSP actually have one, making it one of the least utilised Canadian tax-advantaged investment accounts. 

What Is The RDSP? 

RDSP eligibility is more specific than the other Canadian registered investment accounts. There’s four things that you need to have in order to open an RDSP – 

• You need to be 59 years old or younger as of December 31st of the current year 
• Be a resident of Canada
• Have a valid SIN
• Be eligible for the Disability Tax Credit 

The Disability Tax Credit is a federal tax credit that helps people with disabilities reduce their income taxes, specifically because typically people with disabilities have expenses that other taxpayers don’t have. You have to get approval for this tax credit by completing the required forms and meeting the criteria listed. Essentially, a doctor has to certify that the person has severe and prolonged impairment.

If and when you’re approved for the Disability Tax Credit, you’ll also be eligible to open up an RDSP. 

Benefits Of The RDSP 

The first benefit is that this account is tax sheltered, and all of your investments in this account will grow tax-free. That means, just like all of the other Canadian registered accounts, that the word savings in the RDSP is misleading – in order to take advantage of the tax benefits, you’ll ideally be using this account to invest your money. 

On top of your investments growing tax-free, one of the other benefits of the RDSP account is that the Canadian government will match contributions and provide additional bonds to low income households in order to incentivize more people with disabilities to open, and use, this account. 

Canada Disability Savings Grant

The first program is the Canada Disability Savings Grant (CDSG), which is given to anyone who has an RDSP account. The government will match contributions made – aka money that you put into your account – up to $3,500 annually up to a lifetime maximum of $70,000. That ends up being up to $3,500 per year for 20 years. This is actually the largest government matching program that exists for any registered account. 

Keep in mind that the limit is up to $3,500 annually, but it depends on your income – or your family income if you’re a minor.

If a family makes $98,040 or less, you would need to contribute $1,500 per year yourself in order to get $3,500 from the government. This is how it’s broken down – 

• The government triples the first $500 contributed, and doubles the next $1,000 contributed – aka you get a $3 grant for every $1 contributed up to $1,500 per year, and a $2 gran for every $1 contributed up to $2,000 per year 

If a family makes over $98,040 per year, the government would give you a $1 grant for every $1 contributed – aka an exact match – up to $1,000 per year. 

You can receive grants for contributions made up until December 31st of the year that you turn 49 years old. So, aim to get all of the government matching that you can up to that $70,000 maximum limit before then. 

Canada Disability Savings Bond

On top of the CDSG – aka the grant – there’s also the Canadian Disability Savings Bond (CDSB). This is given to low-income Canadians with disabilities by the government of Canada. 

You can receive a bond of up to $1,000 per year without contributing any money yourself, up to a lifetime limit of $20,000. That means you can get up to $70,000 through the grant and up to $20,000 through the bond for a total of $90,000 given if you are low income and able to contribute the minimum amount in order to receive the government matching. 

This is the breakdown of what classifies as low income based on the 2023 limits – 

• If you make $34,863 or less then you’re eligible for the $1,000 bond 
• If you make between $34,863 and $53,359 then you get some bond, just less than $1,000
• If you make over $53,359 then there is no bond available to you

You Can Carry Forward Unused Grants & Bonds

Something else to note about the grant and the bond is that you can carry forward your unused grant and bond room for up to 10 years at a time until you hit 49 years old. Here’s how that works – 

•  If you were eligible to open an RDSP in the past, but you just haven’t yet, you can still have up to ten years of grant and bond room available – you can make catch up contributions for those years and still receive the government matching grants
• For example, since the RDSP was created in 2008, if you opened up an RDSP in 2018, then you could claim the unused grants and bonds from 2008 to 2018
• But, if you opened up an RDSP in 2021, then you can claim the unused grants and bonds from 2011 to 2021 

Here’s an example to help you visualize how this works – 

• Let’s say you have a disability and have had an income of $15,000 every year since 2008, are eligible for the disability tax credit, and you haven’t opened an RDSP yet 
• In 2023 you open an RDSP – so you can use your grant and bond money that’s been growing for the past 10 years, since 2011
• You would be allowed to have –
  • $1,000 in bond money per year ($1,000 x 10) that you’d get as soon as you open the account
  • Based on the money that you start contributing to the account after you open it, you could have up to $1,500 per year at the 300% matching rate ($1,500 x 10 years) and then $2,000 per year at the 200% rate ($2,000 x 10 years)
• So that’s $10,000 right away, and then up to $35,000 based on your contributions 

Withdrawing From Your RDSP

So what happens when you start to actually withdraw from the RDSP in the future? 

You can withdraw the money that you’ve contributed yourself at any time, but – because the government is providing grants and bonds to you for your future retirement – if you withdraw money from the account that’s been in there for less than 10 years, you have to repay the grant and bond money. 

Here’s how that works – if you withdraw money from your RDSP that’s been in there for less than 10 years, you must repay $3 for every $1 that you take out, up to the total amount of grants and bonds paid into your RDSP from the past 10 years, too. For example – if you contributed $5,000 three years ago, and want to take all $5,000 back out, you’d have to pay up to $15,000 in grants and bonds back (assuming that you have that much money in your RDSP account). 

TLDR? The RDSP should be an account used for future you, and not for yearly use. You can take money out, but you’re losing the ‘free’ money. 

There is an exception if your life expectancy is less than 5 years. If that’s the case, then you can withdraw up to $10,000 per year from your RDSP without having to repay any of the grant or bond money, however the money is taxable, so you’ll pay your current tax rate on that withdrawal. 

To summarize – when you withdraw money from your RDSP after 10 years, there are three categories of money in there – 

• The money you contributed – This money can be taken out tax-free at any time 
• The government grants and bonds – See below
• The income earned on your investments – The government contributions and the income earned is counted towards your income for the year that you withdraw the money out, and you are taxed at your typical tax rate on that money. 

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