Blog » Saving for a Son or Daughter with a Disability (BC)

Saving for a Son or Daughter with a Disability (BC)

What is the best way to save for the future for a son or daughter with a disability?

It depends.  This is a frustrating answer but reflects the reality.  The situation of a family with significant assets and income is difference from one that has few assets and a lower income.  Planning for a 10 year old child is different than planning for a 50 year old son or daughter.   Saving for education costs is different than saving for retirement.

What are you saving for?

A good plan starts with the outcome in mind.  The planning required to purchase a home for your loved one to live in is different from that required to assist them in planning their lifelong dream vacation to Machu Pichu and Lake Titicaca in Peru.  Planning for Thanksgiving Dinner is different than planning for what will happen when parents are no longer able to provide support.

Most often it begins with a vision for the future: a vision that is developed by or with your loved one.  The vision might start off as a plan for how to ensure their future is secure after you have passed on but invariably it involves considering what a good life means for them and for you.  You might start planning for the future but as the vision develops most people ask the question, “why should we wait until we die to ensure that our loved one is living a good life?”

No organization has spent more time thinking about and doing this work with families than PLAN – Planned Lifetime Advocacy Network – so it is not surprising that they have produced the best resources.  The following two books, both by Al Etmanski have great resources for assisting you in envisioning the future:

  • Safe and Secure, Six Steps to Creating a Good Life for People with Disabilities – Available at your nearest London Drugs
  • A Good Life, For you and your family member with a disability – Available at the PLAN Store

Comparing the 4 Government Sponsored Savings Plans

The federal government has four savings plans to encourage and assist Canadians in saving:  Registered Education Savings Plans, Registered Retirement Savings Plans, Registered Disability Savings Plans, and Tax Free Savings Accounts.  The following table compares the four plans.

RESP RRSP RDSP TFSA
Saving for a child’s education Saving for one’s retirement Saving for the future security of a person with a disability Flexible, all-purpose savings vehicle
$50,000 lifetime contribution limit per student $22,450 maximum contribution limit for 2011 plus carry forward of unused room from previous years $200,000 lifetime contribution limit per RDSP $5,000 maximum contribution limit for 2012 plus carry forward of unused room from previous years
Government matches family contributions with the Canada Education Savings Grant (40%, 30% or 20% of contributions) Government provides a tax deduction for contributions Government matches contributions with the Canada Disability Savings Grant (300%, 200% or 100% depending on income) No government incentive for contributions.
Maximum CESG is $500 per year to a lifetime of $7,200 N/A Maximum CDSG is $3,500 per year to a maximum $70,000 N/A
Government contributions of up to $2,000 for lower income families with the Canada Education Savings Bond No additional incentives for people with lower incomes Government contributions of up to $20,000 for lower income families with the Canada Disability Savings Bond No additional incentives for people with lower incomes
Tax on investment income is deferred and taxed in the hands of the student provided money is paid out as an Education Assistance Payment The full amount of all withdrawals are taxable Tax on investment income is deferred and taxed in the hands of the beneficiary when funds are paid out Investment income is not taxable – funds are withdrawn tax free
Funds must be used for post-secondary education Funds can be used for any purpose Funds belong to the beneficiary but can be used for any purpose Funds can be used for any purpose
Funds can be used as soon as the student is enrolled in a qualifying program Funds can be withdrawn anytime (excepting spousal RRSPs) Withdrawals can begin any time but the holdback amount must be repaid to the Government if funds are withdrawn within 10 year of the last Government contribution – this makes the RDSP a long term savings plan Funds can be withdrawn anytime
RESPs are exempt assets for people receiving BC Disability Benefits who have Persons with Disabilities (PWD) status RRSPs are not exempt assets for people receiving BC Disability Benefits RESPs are exempt assets for people receiving BC Disability Benefits who have Persons with Disabilities (PWD) status TFSAs are not exempt assets for people receiving BC Disability Benefits.
Education costs may be exempted from education savings plan revenue at the Minister’s discretion Income from RRSPs is not exempt for the purposes of BC Disability Benefits Income from RDSPs is exempt for the purposes of BC Disability Benefits Income from TFSAs is not exempt for the purposes of BC Disability Benefits
Collapsed with original contributions and part of investment income returned to parents if the student passes away before use.  Investment income taxable in the hands of the parents Becomes taxable income in the year of death but can be rolled into RRSP of spouse or minor child or RDSP of child or grandchild or passed on to designated beneficiary or estate Collapsed if beneficiary passes away – holdback amount, if any returns to government, remainder goes to beneficiary’s estate.  Tax is payable on government and income portion of the asset Collapsed at death and passes to designated beneficiary or estate without tax consequences

Comparison

The RDSP is the best long term savings plan. The following graphs compare the amount of savings and the income produced for an RDSP and an RRSP.

For the RDSP we assumed that the contributions are $1,500 a year from age 18 to 37: a total of $30,000.  This is the amount necessary to maximize the Canada Disability Savings Grant.  We assumed the same $1,500 a year contributions to the RRSP, except we assumed the contributor received a tax deduction at the top marginal rate in BC, 43.7%, and we reinvested that deduction.  As a result the annual contribution to the RRSP was actually $2,156.

Calculations assume annual investment returns of 5%.  Without making any withdrawals from either plan the RDSP will grow to about $625,000 by the age of 60 while the RRSP will only grow to about $230,000.



The following figure shows the monthly income that each plan can sustain.  We assumed that payments from each plan would begin at age 48 and be the amount calculated by the RDSP LDAP formula (approximately the amount in the plan divided by the number of years before the beneficiary turns 83). We have not deducted income tax payable.  The entire RRSP payment would be taxable while about 92.5% of the RDSP would be taxable.

The monthly income produced by the RDSP is approximately two and a half times greater than that produced by the RRSP. The conclusion is that, even for someone contributing to an RRSP at the highest marginal tax rate, the RDSP is more than twice as effective for saving and producing income.

Tips

  • Even if you are saving in an RDSP, you may want to plan to put part of your estate in a trust. If you don’t want to repay the holdback amount, any money that you contribute will need to stay at least 10 years after you receive the last government amounts.  That means if you receive government Grant or Bond for 15 years, the withdrawals cannot begin until 25 years after your first contribution.  If you pass away unexpectedly, a trust can continue to make RDSP contributions, provide funds for emergencies and cover the waiting period before the RDSP kicks in.
  • The RDSP is too long term to save for a child’s education. If you want to save for a child’s future educational costs, the RESP is still better even if government contributions to an RDSP are greater.  You can contribute to both if you have the means and an RESP is exempt for BC Disability Benefits.
  • RRSPs and TFSAs are poor savings vehicles for a person who might depend on BC Disability Benefits as both are considered liquid assets. A single person may have up to $3,000 and a couple or family up to $5,000 in total liquid assets.  Above that amount and the person is disqualified from benefits.
  • RDSPs and TFSAs are better for people who are seniors. Once the person turns 65, stops receiving BC Disability Benefits and starts receiving Old Age Security and Guaranteed Income Supplement 50% of income is deducted from Guaranteed Income Supplement.  Income from RDSPs and TFSAs are exempt.
  • Remember that people with lower incomes qualify for the Canada Disability Savings Bond. That means that they can open an RDSP and the federal government will contribute even if they cannot.
  • Where people do not qualify for the RDSP, families should look to their estate planning to pass on assets in a tax effective manner.

Note: While Canada’s four registered plans are the same from coast to coast, the way in which they are treated by provincial disability benefits varies from province to province.  While most of this post is accurate in all provinces, in areas where the plans impact provincial disabilities it can only be considered accurate in British Columbia.