Savings plans for disabled offer long-term security

From Saturday's Globe and Mail

It's time to interrupt the 2009 RRSP/TFSA sell-a-thon for a moment to provide some exposure to a worthy but overlooked new program called the registered disability savings plan.

RDSPs are a tax-sheltered savings tool that disabled people can use themselves, or through parents or legal guardians. Friends and family can help out with RDSPs, too, by making contributions.

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Obviously, the core audience for RDSPs isn't close to what it is for the registered retirement savings plan or the just-introduced Tax-Free Savings Account. Still, there are estimates that as many as 500,000 Canadians with disabilities could benefit from the RDSP.

There are some challenges, however. One is that only a small number of financial companies are offering them so far, and the menu of potential investments is limited. Another is the complexity of the rule, although the basics are simple enough.

RDSPs are open to those who are 59 or younger and eligible to receive the disability tax credit, which is for people who are markedly restricted in the ability to perform normal daily activities. A disabled person who has reached the age of majority can open a plan, as can a guardian or legal representative. Parents can open plans for a minor.

If you're familiar with registered education savings plans, or RESPs, then you're half way to mastery of the RDSP. As with the education plan, there's no tax deduction for making a contribution. As with the RESP, funds are sheltered from the Canada Revenue Agency until they're withdrawn and taxed in the hands of the beneficiary.

Another RESP similarity is that contributions generate free money from the federal government. Through the Canada Disability Savings Grant, Ottawa will put as much as $3,500 in an RDSP each year (lower- to mid-income families benefit most). An additional benefit for low-income families, the Canada Disability Savings Bond, can generate an extra $1,000 in federal money. The actual amount of grant money depends on how much you contribute, but the disability savings bond is paid regardless of whether contributions are made.

Because RDSPs became available only late last year, the federal government is allowing people to receive grant and bond money for 2008 if they set up and contribute to a plan by March 2. That means there's just two weeks to take advantage of this government largesse. If you miss the deadline, your RDSP will potentially attract grant and bond money for 2009.

The lifetime limit on putting money in an RDSP is $200,000. There are no annual limits on contributions, or restrictions on what money withdrawn from a plan can be used for. You can take money out any time, but beware a potentially severe clawback of federal grant and bond money.

In offering these funds to RDSP holders, Ottawa has set a condition. If you take money out of your plan, any government contributions you received in the previous 10 years must be repaid

"These plans are really for the long-term financial security of Canadians with disabilities," explained David Sharone, product manager registered plans for the mutual fund division of Bank of Montreal, which in December became the first bank to offer RDSPs.

On Monday, Royal Bank of Canada will join BMO, and other financial companies are expected to step up in the year ahead. Simple economics explain why more companies aren't offering RDSPs. There aren't enough potential customers to generate the same kind of revenues as RRSPs and TFSAs, and the record-keeping requirements for these accounts are massive.

Both BMO and RBC have adopted a no-fee policy for owning and operating RDSPs. There are no annual administration fees as there often are with other registered plans, and there are no fees to make withdrawals.

Both banks offer just a small menu of investments for RDSPs - their own in-house mutual funds, guaranteed investment certificates and savings accounts. Neither is offering a self-directed plan that would allow a broader selection of investments.

There are good arguments for taking a somewhat aggressive approach to investing in an RDSP, one being the requirement that grant and bond money sit for 10 years before withdrawals can be made without a clawback. That's sufficient time to warrant some exposure to the stock markets, which are at low ebb right now and could rebound in the years ahead.

The very fact that Ottawa is kicking in some money also argues for stock market exposure. Federal grant and bond money provides what amounts to a guaranteed return, and this helps take the edge off the risks inherent in the stock markets.

"The basic advice would be to certainly consider long-term mutual funds [that means equity funds]in the mix for an RDSP," said David Birkbeck, head of registered product strategy at RBC.

One way to get some stock market exposure would be to use the dividend mutual funds offered by BMO and RBC. BMO Dividend averaged 7 per cent annually for the 10 years to Jan. 31, and that includes last year's horrendous stock market performance. RBC Canadian Dividend averaged 6.4 per cent a year over the same period.

RDSPs at Royal Bank are sold through a network of 2,000 financial planners who are located in branches or who are mobile and can visit clients in their homes. "RDSPs are quite complicated and people really need to sit down with somebody to go through the details," Mr. Birkbeck said.

BMO's RDSPs are sold through specially trained staff located in call centres rather than in branches. "The market is not very large, so we thought that traffic in the branches wouldn't be as regular as for other products," BMO's Mr. Sharone said. "So what we decided to do was train our centre staff in Toronto in Montreal on RDSPs."

He said customers have the option of contacting the call centre while visiting their BMO branch, or they can telephone directly and have an application form mailed out to them.

rcarrick@globeandmail.com

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The ABCs of RDSPs

The new registered disability savings plan, or RDSP, allows disabled people or their families to save for the future in a tax-sheltered plan that can also generate contributions from the federal government. Here's how:

CANADA DISABILITY SAVINGS GRANT

Beneficiary's family income $75,769 or less Over $75,769
$3 for every $1 contributed on the first $500 to a max of $1,500 per year; $2 for every $1 contributed on the next $1,000 to a max of $2,000 per year $1 for every $1 contributed to a max of $1,000 per year

Lifetime maximum grant money available: $70,000

CANADA DISABILITY SAVINGS BOND

Family income of $21,287 or less $21,287 to $37,885 More than $37,885
$1,000 per year without any contribution to an RDSP A pro-rated portion of $1,000 Nil

Lifetime maximum bond money available: $20,000

Note: Family income thresholds are indexed annually to inflation; these are 2008 levels. Grant and bond money can be received until the year in which the beneficiary turns 50.

THE GLOBE AND MAIL // SOURCE: PLANNED LIFETIME ADVOCACY NETWORK, HUMAN RESOURCES

AND SKILLS DEVELOPMENT CANADA