Thursday, January 22, 2009

Anyone heard of an RDSP?

I firmly believe it is the alienable right of all Canadians to criticise the government when they screw up. However, I also believe that when they do something right, then they deserve the kudos that should come with it. Can you imagine having a savings plan where if you were to contribute $1,500, the government would top that up with an additional $4,500? This is not a fantasy. This is the RDSP (Registered Disability Savings Plan).

For many years, disabled Canadians have complained about the inequities in the system. Imagine being told you are not allowed to save money for your future, or "inherit" money or you would lose out on the income benefits provided through government assistance (such as the Ontario Disability Support Program). Essentially you were stuck in a financial rut with little or no hope for escape.

Several years ago, a successful legal challenge solved the problem for inheritance. The Henson Trust was named after an Ontario man, Leonard Henson, who wanted to pass his entire estate onto his disabled daughter. But if she became the sole beneficiary of the estate and therefore "owned" significant assets and/or property, the government would consider her ineligible for any social assistance payments. However, the relevant regulations did allow a person in her position to have some money in hand and didn't hold it against a disabled person when a third party provided a discretionary benefit.For this reason, Mr. Henson drafted his will so that his entire estate was transferred to three trustees to be held on his daughter's behalf. The trustees (and this is the oh so very important part) had the discretion to withhold or spend the income and capital to best serve the daughter's interests. For example, money from the estate could be used to buy her a TV or new clothes or pay for a chaperoned trip. And because these payments were considered discretionary benefits, she still qualified for government support. What the will didn't do was give the daughter a legal claim to demand money. Unlike the traditional trust that parents often set up in their wills for their minor children, Henson's daughter would never be in a position to go to court and claim that the trustees were wrongfully withholding trust monies from her. It was precisely because she had no legal claim to the monies that the government could not treat the money as hers after she inherited it.

Despite this, the government still saw fit to withhold the daughter's social assistance after Henson died. Which meant that she that she (or more accurately her guardian) was forced to take the matter to court. The Ontario Court of Appeal ruled that the daughter was eligible for continued government benefits and ordered the payments to be reinstated. Unfortunately, it was a hollow victory for Henson's daughter as she died before the Court of Appeal could rule in her favour.

Individuals with disabilities are now reaping another benefit - the above noted Registered Disability Savings Plan. This link to the Service Canada web page explains the intricacies of the plan. If you are under age 60, eligible for the disability tax credit and a Canadian residence, you may qualify for benefits. Anyone (family, friends or the beneficiary) can contribute to the plan. If you like to read, Mackenzie Financial's "investor guide" is the best summary from an investment firm I have seen.

Planned Lifetime Advocacy Network (PLAN) is a non-profit organization, established in 1989 by and for families committed to future planning and securing a good life for their relative with a disability. The website they created is the go-to website for any information relating to the RDSP, including financial updates, provincial treatments, details and analysis, stories, the new RDSP Calculator, and much more.

After downloading their calculator program, I plugged in the numbers for a friend of mine to see how they would benefit. The person is age 32 and has a permanent disability. Their family income is roughly $65,000. Assuming they contributed the $1500 figure every year until age 49, invested at an average 5.5% return (their figure not mine), at age 60 the value of the plan would be $251,791. Total contributions to the plan? Only $27,000. This would then translate into an annual income beginning at age 60 of roughly $11,000 indexed to inflation.

I wondered what would happen if those same funds were directed to an spousal RSP. The result based on the same funds in? Barely $100,000. Even reinvesting the tax refunds each year would only increase the amount to just over $130,000. In other words, for a disabled person, over a period of 30 years , they can earn essentially 10 times their contributions. The only problem now is waiting for the various financial institutions to "finalize" the paperwork and enable disabled Canadians to begin saving.

Not everyone will qualify for the plan, but for those who do, the only question would seem to be "would you like to contribute annually or is monthly better"?

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