A Registered Disability Savings Plan (RDSP) U.S. Tax Overview

A Registered Disability Savings Plan (RDSP) U.S. Tax Overview

Overview of Registered Disability Savings Plan (RDSP) 

When it comes to Canada and the various registered savings plans, the two most common types of plans are the RRSP (Registered Retirement Savings Plan) and the RRIF (Registered Retirement Income Fund). Another type of retirement savings plan that is equally important is the RDSP or the ‘Registered Disability Savings Plan). The RDSP is similar in part to the RRSP and RRIF but is treated differently by the IRS for tax purposes. For example, income generated during the growth can be taxable under U.S. tax law (whereas income growth in an RRSP for example is typically tax-deferred at the Federal Level in the U.S. until distribution). Noting, some states tax the RRSP growth despite the beneficial tax treatment from the IRS. Let’s take a brief look at the RDSP for tax and reporting purposes.

First, What is an RDSP?

As provided by the CRA (Canada Revenue Agency)

• • • “A registered disability savings plan (RDSP) is a savings plan intended to help an individual who is approved to receive the disability tax credit (DTC) to save for their long-term financial security.

    • Contributions to an RDSP are not tax deductible and can be made until the end of the year in which the beneficiary turns 59.

    • Contributions that are withdrawn are not included as income to the beneficiary when paid out of an RDSP.

    • However, the Canada disability savings grant (grant), the Canada disability savings bond (bond), investment income earned in the plan, and the proceeds from rollovers are included in the beneficiary’s income for tax purposes when paid out of the RDSP.”

RDSP Contributions are not Tax Deductible

In Canada, contributions to the RDSP are not tax deductible, which would mean under US tax law the contributions are also not deductible either. For example, when a taxpayer contributes pre-tax dollars to their 401K, the amount that is contributed can be deducted from the taxpayer’s gross income in the year the contribution is made. This type of tax treatment is not afforded to RDSP contributions.

Tax-Free In Canada, But What About the U.S.?

The biggest headache for U.S. persons who have RDSP is that unlike Canada in which the growth within the RDSP is tax-free, under U.S. tax law the growth is taxable. Therefore, when the RDSP administrator is made aware that the person is a U.S. person for tax purposes such as a U.S. citizen, lawful permanent resident, or foreign national who meets the substantial presence test, they will issue a Form-1099 so that the U.S. taxpayer includes the growth within the RDSP on their U.S. tax return. Typically, since taxes are not being withheld in Canada, there are no foreign tax credits to apply.

As provided by the CRA (Canada Revenue Agency)

• • • “All contributions, rollovers, grants, bonds, and investment earnings grow tax-free while they are in an RDSP. Grants, bonds, rollovers, and investment earnings are included in the beneficiary’s income for tax purposes when withdrawn.”

International Reporting (FBAR and Form 8938)

Regarding reporting, the RDSP is reported on the standard international information reporting forms. This would include having to report the maximum value of the RDSP on the FBAR (FinCEN Form 114) and Form 8938 (FATCA), presuming that the threshold requirements for having to file these forms were met. If taxpayers do not meet the threshold requirements for having to file either one of these forms, then the forms are not required, but the taxpayer would still identify on Schedule B, question 7 — confirming that they have ownership (or signature authority) over a foreign account.

What About Form 3520 and 3520-A?

In general, Canadian Registered Retirement Plans are exempt from Forms 3520 and 3520-A. Taxpayers can refer to the different proposed regulations and revenue procedures such as Rev. Proc. 2014-55 and Rev. Proc 2020-17 for additional information on reporting RDSP on Form 3520 or Form 3520-A.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.