Comparison of Registered Plans in Canada
Most people are aware of the Registered Retirement Savings Plan (RRSP) and the Registered Educations Savings Plan (RESP). To understand how the RDSP works, it is useful to compare the characteristics of the three plans across three areas: federal incentives to save; treatment of income; and taxation of withdrawals.
|Registered Disability Savings Plan||Registered Education Savings Plan||Registered Retirement Savings Plan||Tax Free Savings Plan|
|Incentives||Grant + Bond||Grant + Bond||Tax Deduction||None|
|Treatment of Income||Tax-deferred Growth||Tax-deferred Growth||Tax-deferred Growth||Tax-free Growth|
|Withdrawals||Partly Taxable||Partly Taxable||All Taxable||Not Taxable|
Registered Education Savings Plan (RESP)
The incentive for contributing to the RESP is the Canada Education Savings Grant, which contributes 20% to 40% of what we contribute to a maximum of $600 per year. Investments in an RESP will grow tax-free. The Canada Education Savings Bond is available for lower income families. When withdrawals from RESPs are made, tax is not payable on the private contributions. Tax is payable on the grant and income (in the hands of the student).
Registered Retirement Savings Plan (RRSP)
The incentive for contributing to an RRSP is a tax deduction. The value of the tax deduction, depends on an individual’s income. The more income, the more the tax deduction is worth, because tax rates are higher on higher incomes. Investments in an RRSP will grow tax-free, but any withdrawals are considered income and therefore are taxable.
Tax Free Savings Plan (TFSP)
Tax Free Savings Plans (TFSPs) allow people to contribute $5000 per year and use the funds at any point without penalty. There is no incentive (grant or tax deduction) for saving. The funds grow on a “tax-free” basis and can be withdrawn anytime. No tax is payable on funds withdrawn.
Registered Disability Savings Plan (RDSP)
Like the RESP, the incentive for contributing to a RDSP is a grant. Furthermore, just as there is a Learning Bond, there is a Disability Savings Bond, both targeted at people with lower incomes both income-tested, and neither requiring contributions. Like RESPs and RRSPs, tax is not payable on investments until funds are withdrawn. Similar to RESPs, when withdrawals are made, tax is not be payable on the private contributions but is payable on the federal contributions and investment income.
If a person contributes to an RDSP, will he/she receive a tax deduction on his/her income tax return?
No! The incentive to contribute to a person’s RSDP is that the private contribution attracts federal government contributions into the RDSP.
People often think that tax deductions are better than a government grant but this is not the case with the RDSP. The value of the Canada Disability Savings Grant is actually much greater than any tax deduction. For example, the maximum tax deduction that a person can get for contributing to an RRSP is about 45%. The maximum Grant is 300%.
|Maximum RRSP Tax Deduction (45%)||Maximum Canada Disability Savings Grant|
|Contribution of $500||$225||$1,500|
|Contribution of $1,000||$450||$2,500|
|Contribution of $1,500||$675||$3,500|
The difference is that the contributor gets a tax deduction when he/she contributes to an RRSP. The beneficiary’s RDSP receives a grant when a contribution is made to their RDSP.