Registered Disability Savings Plans are savings plans intended to help families of disabled individuals save for their future. Like RRSP’s, the savings work best over the long term.
The easiest way to grasp how they work is by thinking of them as an RRSP then comparing the differences and similiarities.
Like an RRSP, a RDSP is a type of longer term savings account administered typically by financial institutions like banks and insurance companies. With an RDSP, the disabled individual or their legal rep would open an RDSP account at one of these financial companies.
Unlike an RRSP though, family members of the disabled individual are the ones that can make contributions. Also unlike an RRSP, contributions made into an RDSP by a family member do not qualify for a tax deduction.
Similiar to an RRSP though, RDSP’s accumulate interest on a tax sheltered basis. So as the plan grows and earns interest, that interest is not taxed as long as it stays in the fund.
In addition to deposits made into the plan by family members, and the growth of that plan going forward, there are two other types of income available for the fund; Canada Disability Savings Grant (CDSG) and Canada Disability Savings Bond (CDSB). These two supplements are paid by the Canadian Government into the fund. The exact amount of those supplements are based on family income.
Like an RRSP, taxation occurs when the money is withdrawn from the fund. When money is withdrawn, original deposits from family members are not taxable. But interest, CDSG and CDSB are taxable in the hands of the disabled individual.
Here’s some further reading on Registered Disability Savings Plans:
Canada Disability Savings Grants and Canada Disability Savings Bonds
RDSP Frequently Asked Questions
And finally, how do you proceed to set up an RDSP? I recommend a two step process. First, speak to your accountant to discuss the specifics of this financial vehicle as it relates to you specifically (CDSG and CDSB for example are affected by family income) and discuss things like amounts of deposits. Armed with that information, you can then contact your financial advisor to set up a plan for you at an appropriate institution.
UPDATE: Two more excellent links on RDSP’s:
RDSP.com including an RDSP calculator
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