Fine-tune your financial health with RDSPs and RESPs

When it comes to fitness training, the key to getting the absolute most out of your time and effort is to create the specific diet and exercise regime that best matches your needs. The same is true of fine-tuning your personal finances.

So while registered plans such as RRSPs and TSFSAs are certainly great general tools for meeting long-term savings goals, it’s well worth finding out if two other, more targeted registered plans could be right for you or your family: RDSPs and RESPs.

What is an RDSP?

If you’re under 60 years old, a Canadian resident and you qualify for the federal disability tax credit, you likely qualify for an RDSP (Registered Disability Savings Plan). Like a TFSA (Tax Free Savings Account) or RRSP (Registered Retirement Savings Account), the RDSP is a registered savings tool through which you can save and invest for your long-term needs. However, unlike TFSAs and RRSPs, RDSPs also receive government contributions in the form of grants and bonds. Exactly how much depends on your household income and how much you contribute yourself, but the government contributions can be substantial, capping out at a maximum of $90,000, provided you qualify for all available grants and bonds.

Another major advantage of the RDSP is that income from the program in no way interferes with your other government disability benefits, potentially making it a more attractive savings option than an RRSP or a TSFA.

Bottom line: if you or someone you care for has a registered disability, it’s well worth asking your financial advisor about this program.

This sounds too good to be true. Is there anything else I should know about RDSPs?

The potential gains from an RDSP are immense, but there are several elements that it’s important to understand before your invest in an RDSP.

Mind the 10-year rule. What is the 10-year rule? Basically, with a few exceptions, if money is withdrawn from an RDSP within 10 years of the last contribution, the government will take back a portion of the contributions it made within that span. As of 2013, for every one dollar you withdraw, three dollars in government contributions from the past 10 years will be clawed back. To avoid this clawback, you have to wait the full 10 years from your last deposit. The reasoning behind this is that the RDSP is meant to be a long-term savings tool, helping people with a registered disability to save for retirement or some other long-term goal.

RDSP government grants and bonds end after you turn 49. If you think you might qualify for an RDSP, it’s important to look into the program as soon as possible. While you may retroactively receive grants for preceding eligible years when you apply for the program (calculated based on your income for those years), after the end of the year in which you turn age 49, you are no longer eligible for any grants or bonds, even retroactive ones.

No money to invest? No problem. With an RDSP, you can benefit without contributing a dime. The bottom line with this program is that there is a great deal of free money available so long as you qualify and are below the age of 49. This is true even if you can’t afford to make any contributions of your own, as the government makes contributions just for opening the account in cases where income is low enough.

The contributor can be someone other than the beneficiary. If you know anyone who qualifies for the disability tax credit and you want to contribute to an RDSP on their behalf, you can do so. This can be a great tool for ensuring the long-term financial well-being of a loved one with a disability.

What is an RESP?

An RESP (Registered Education Savings Plan) is a registered investment vehicle used for saving for post-secondary education. Much like with RDSPs, the government provides grant money for contributions made to an RESP, with the exact amount depending on household income and your own current and past contributions. Investment income within the RESP is also deferred until withdrawn.

When the recipient enrolls in a recognized post-secondary institution, he or she receives access to the funds from the RESP, in a manner spelled out when the RESP was first created. At the time of withdrawal, any portion of the grants and investment income that is considered part of the withdrawal is then taxable income of the beneficiary, but as the beneficiary is a student at the time and likely in a low income bracket, the taxable amount may be negligible.

Put simply, RESPs are a great tool for saving for post-secondary education, with their main advantages being the generous government grants that bolster their growth and the tax-deferral until time of withdrawal.

Are all RESPs the same?

A common misconception is that all RESPs are the same. They’re not. RESPs come in everything from scholarship plans (a pooled investment plan) to dedicated student accounts to family plans, which allow you to share among siblings. Options for withdrawing the funds also vary from plan to plan, so make sure to select one that makes sense for you. A good strategy is to choose a plan that allows the recipient to remove the money as quickly as possible after registering with a post-secondary institution. That way if your child decides to leave school in favour of backpacking around the world, at least you’ll still receive the full benefit of all those years of saving (and may not have to repay the government grants). If money is left in the account, it can be more cumbersome to get out, penalties may apply and you’ll lose the remainder put in by government.

Finally, beware of any RESP salesperson who only sells RESPs, and no other financial products. These plans may charge exorbitant fees on your investments and withdrawals, fees that you can avoid with a normal RESP. To avoid companies such as these, stick with a trusted financial institution or an objective advisor who sells more than just RESPs.

Interested in finding out more about RDSPs and RESPs? Talk with a local