Get maximum benefit out of an RDSP

The RDSP encourages people with disabilities and their families to save for the long term without affecting their provincial benefits. The savings plan does not count toward the asset test for provincial benefits and, in most provinces (except for Quebec, New Brunswick and Prince Edward Island), does not count toward the income test when money is withdrawn from the account.

To make the account more enticing, the government has implemented the Canada Disability Savings Grant (a matching program) and the Canada Disability Savings Bond (for low-income families). Both programs are based on family net income – if the beneficiary is under 18 years old, it’s the parents’ family net income (line 236 on their T1 General) that’s used. If the beneficiary is over 18, it’s based on his family net income beginning January 1 the year after he turns 18.

It’s important to note that family net income is always based on income from the second preceding year because CRA has not finished filing all tax returns at the beginning of the year. For example, for 2015, the tax deadline was May 2, 2016. As a result, in order to determine family net income, CRA has to look at 2014 because that is the only tax data they have on file.

Here’s the family net income for 2016, and the amount of grant the beneficiary would be eligible for.

Family Net Income	Matching rate	Maximum annual grant
Up to or equal to $90,563	300% on the first $500200% on next $1,000	$3,500
More than $90,563	100% on the first $1,000	$1,000

The problem

There’s confusion when it comes to the family net income that’s used to calculate the grant entitlement. Regardless of where the beneficiary lives, grant and bond entitlements will be based on his family net income as of January 1 of the year after he reaches age 18. This is the case whether he lives at home or independently, and is regardless of whether he’s contractually competent or not. Also, the beneficiary’s family net income is used even if he’s financially dependent on someone.

Read: 5 improvements to the RDSP

Let’s go through an example.

Jason is 12 and his parents, Julie and John, have a family net income of $160,000. Would it make more sense to open the RDSP now and have it based on the parents’ family net income until Jason is 18, or should they wait until after Jason turns 18?

Option 1: Now

Say they open the RDSP now and receive a 100% match on the first $1,000 contributed annually. Once Jason reaches 18, the grant will be based on his family net income as of January 1 of the year after he turns 18. The assumption is Jason will be eligible for the maximum grant and bond once they are based on his family net income.

Assuming a 5% rate of returns, from ages 12 to 18, a $1,000 annual contribution will give Jason a grant of $1,000 annually, for a total $7,000 grant and $7,000 in contributions at the end of the seven years. Contributions, grant and growth during this period will amount to $17,098.

Once Jason is 19, the grant and bond will be based on his family net income. He’s already received $7,000 in grants, so he’s eligible for an additional $63,000. At the maximum grant, it will take him 18 years to receive $63,000 in grants and $18,000 in bonds. At the end of the 18-year period, Jason will have received $70,000 grants, $18,000 in bonds and would’ve made contributions of $34,000 (this is the total of his contributions and his parents). At the end of this 18-year period, Jason’s account will be valued at $218,383.

Jason is eligible for the bond for two more years; no contributions are required for Jason to receive the bond. If he continues to contribute $1,500 to the account, and receives $1,000 in bonds annually after two years, the account will be valued at $246,148. If Jason continues to contribute $1,500 to his account annually until he reaches age 59, he will not receive grants because he’s already received the maximum amount. But the value of his account will continue to grow and will be $705,183 at age 60.

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Option 2: Later

Let’s look at how Jason’s account will look if he didn’t begin contributing to the RDSP until after he was 18, and the grant and bond are based on his family net income. With an RDSP, someone is able to catch up on grants they missed back 10 years or to the date of diagnosis (whichever date is more recent; the RDSP was launched in 2008, so the earliest one can go back is 2008).

Jason wants the grant to be based on his family net income, so he decided not to take advantage of the carry forward back to age 12 when he became DTC eligible. With an annual contribution of $1,500 by age 38, he’ll have contributed $30,000 to the account and received grants of $70,000, based on the assumption that he’s eligible for the maximum grant for the entire period. If he was also eligible for the maximum bond, he would’ve received an additional $20,000 in bonds. At a 5% rate of return, the account will be valued at $208,316. If he continues to contribute $1,500 annually from ages 39 to 59, the value of his account at age 60 will be $604,803.

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Let’s see how the two options compare in a line graph:

The difference between the two options? Waiting until the grant and bond are based on his own family net income means he’ll have an account value of $604,803 by age 60. But if he begins to contribute now and have the grant based on his parents’ family net income until he turns 18, his account would be valued at $705,183 by age 60. This is a difference of $100,380, and proves it’s in Jason’s best interest to begin contributing now, rather than waiting.