How much should I put in my RDSP?

Patricia, 27, has type 1 diabetes and qualifies for the disability tax credit. Here’s how she should spread the money between her RRSP, RDSP and TFSA

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Q: I have $50,000 saved up and I’m adding to my savings every month. I want to buy a home in the next 5 years. I have lots of choices and I’m not sure what to do. My investment adviser doesn’t really know how an RDSP works.—Patricia, Vancouver

A: Patricia, I’m not surprised your investment adviser doesn’t know much about RDSPs. Even though they were introduced in 2008, they’re really not very prevalent. Only Canadians with disabilities, or their friends and family, can open an account. And among those who qualify, uptake has been limited.

RDSPs can be onerous accounts to open and they’re not very profitable for the investment industry as compared to other types of existing accounts either, so you’re limited in terms of where you can open an RDSP. Currently only 12 financial organizations offer them.

That said, they offer a lucrative investment opportunity. At your level of income (about $70,000) you can get government grants of $3,500 per year by contributing $1,500 to your RDSP. In other words, a $1,500 contribution magically becomes $5,000. That’s a 333% return right off the bat. The investments you choose then grow tax-deferred.

The catch with RDSPs is that if you take a withdrawal from the account, you have to repay all the government grants for the previous 10 years. So it’s not meant to be a short-term savings vehicle. With an RDSP, you really are incentivized to save for the long-term.

RDSP withdrawals must start by age 60. Your initial contributions, or principle, come out tax-free, but grants and growth are considered taxable income.

So if I were you, I’d take advantage of your annual $1,500 RDSP contribution and take all the free money you can get from the government. I’d invest your RDSP for the long-term and treat it like an RRSP. Consider your RDSP retirement money.

Your RRSP, despite being called a “retirement” account, on the other hand is the account I’d consider using for short-term savings in your case. You can take advantage of the Home Buyer’s Plan (HBP) that allows you to take up to $25,000 from your RRSP for the purchase of a home. And given your 5-year timeline to invest in a primary residence, I’d take a 5-year timeline with the building of your RRSP, as well as the riskiness of the investments you put in it.

Maybe you target $5,000 a year for the next 5 years into your RRSP, with the intention of using up to $25,000 towards a home purchase. You could put $25,000 in right off the bat, but I’d be inclined to do it slowly and steadily. Your RRSP contributions will of course generate tax refunds, with the account growing tax-deferred as well.

Given you have $50,000 in savings right now, allocating $5,000 to your RRSP and $1,500 to your RDSP still leaves $43,500. You have $31,000 of TFSA room, since you’ve never contributed, so I’d allocate those monies accordingly. TFSA contributions won’t generate tax refunds, but your investments will grow tax-free.

With the remaining $12,500, I’d leave this in your non-registered account.

Going forward, target $5,000 to your RRSP, $5,500 to your TFSA and $1,500 to your RDSP each year, which it sounds like you can likely do just from your monthly savings. If you weren’t able to do so, you’ve got $12,500 in non-registered investments to top up.

Keep the RRSP, TFSA and non-registered investments fairly conservative, because there’s a good chance you’ll need most or all of it in the next 5 years for a home and you’d hate to go risky with 100% in stocks and need the money in a stock market downturn.

Take your risk with your RDSP, as in your case, that’s going to be your long-term investment.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products.

3 comments on “How much should I put in my RDSP?

  1. What are the age restrictions on RDSP Grants? I seem to recall age 49 being the cutoff age for the government grant portion of the account which seemed totally arbitrary to me.

    Reply

    • There’s a few different age cutoffs. You are correct in that grants and bonds are only paid up to the year the beneficiary turns 49. You can contribute into an RDSP though up until the end of the year the beneficiary turns 59, which is also the deadline for opening an RDSP. Payments from the RDSP must start by the end of the year in which the beneficiary turns 60.

      Reply

  2. Unfortunately you don’t know entirely how RDSPs work either. The 2012 Federal budget changed the grant repayment rules effective Jan 1, 2014. For withdrawals made from an RDSP, the proportional repayment rule will require that, for each $1 withdrawn from an RDSP, $3 of any CDSGs or CDSBs paid into the plan in the 10 years preceding the withdrawal be repaid. So if someone withdraws $500, they only have to pay back $1500 of CDSGs or CDSBs and not the entire amount of grants received in the previous 10 years.

    Reply

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