Five reasons for a person in their 50s to open an RDSP
People who are 50 and older often believe that it’s not worth opening and contributing to a Registered Disability Savings Plan. This belief is often reinforced by professionals and or support workers.
It is not always true. There are a number of situations in which opening and contributing to an RDSP, even after the age of 50, can be beneficial.
Here are the main reasons why:
1. Asset testing of provincial social assistance for people with disabilities
Occasionally people receive a substantial amount of money from an estate, injury compensation, termination settlement or a retroactive tax claim.
Eligibility for provincial social assistance is asset tested in all provinces. Possession of liquid assets (accessible cash) of more than a maximum limit will deem a person ineligible for social assistance benefits. This amount is generally around $3,000 (BC, New Brunswick, Nova Scotia, Newfoundland and Labrador) but is as low as $900 in Prince Edward Island. Alberta is unique in permitting people to have $100,000 in assets before deeming them ineligible for Assured Income for the Severely Handicapped (AISH).
Every province, however, enables people to shelter funds in RDSPs without losing eligibility for social assistance.
2. Income testing of provincial social assistance for people with disabilities
Every province limits the amount of income that people can receive before their social assistance is reduced and in many provinces this is quite restrictive. The result is that people on social assistance have an income ceiling above which it is generally very difficult to rise.
Most provinces permit people to receive any income amount from an RDSP without reducing their benefits. (Quebec, New Brunswick and Prince Edward Island permit some income from RDSPs without reducing benefits.) The result is that people are able to increase their income above social assistance amounts.
If the RDSP is opened after the age of 50, no federal government money will be received. The upside is that the funds can be used at any point without penalty from either the federal government or provincial government.
3. Guaranteed Income Supplement
At age 65 people in all provinces stop receiving provincial social assistance and start to receive federal senior’s benefits: Old Age Security and Guaranteed Income Supplement. While Old Age Security is not income tested, 50% of income is deducted from Guaranteed Income Supplement.
Income from RDSPs does not reduce Guaranteed Income Supplement. This means that a person can receive all of their Old Age Security, Guaranteed Income Supplement and RDSP Payments without reductions from any.
4. Tax Benefits
Because the RDSP is a registered plan, investment income earned in it is tax deferred. That means that it is not taxable until it is withdrawn. (Remember that personal contributions are not taxable upon withdrawal).
More importantly, however, the RDSP can serve as a receptacle for the Rollover of a RRSP or RRIF. In brief, a parent or grandparent can “rollover” funds in an RRSP or RRIF at death to the RDSP of a child or grandchild, who is financially dependent. The rollover means that the funds rolled over from the RRSP or RRIF, which would normally all be taxable in the year of the annuitants death, receive an offsetting tax deduction. The result is a substantial tax savings.
5. Easier to set up and administer than a trust
It is possible to place assets in a trust, and use some funds for certain purposes, without affecting social assistance in most provinces. The advantage of setting up an RDSP, if a person is eligible, is that there is no need to engage a lawyer and no need to identify a trustee (and pay the legal and trustee respective fees).