RDSP Q & A: The 10 year rule is almost up. Now what?

May 13, 2018

Question:

Many people started their RDSP in 2008, which means the 10 year waiting period for the first year of contributions is soon up. Now what? Can I actually take the money out now? What are some things to consider?

 

Answer:

I urge caution and careful analysis. We advise caution and restraint in deciding whether to withdraw funds from the RDSP. For most people, withdrawing money from an RDSP after it has been open for 10 years will result in a loss of government grants and bonds and will greatly reduce the future earning potential of the RDSP. The blueprint for the RDSP was an idea of PLAN parents concerned with what would happen to their son or daughter with a disability when they died and their ongoing financial support ended. Many persons with disabilities do not have trust funds and many will not have worked very long or for organizations with a pension plan. The RDSP is designed to provide the equivalent of a pension plan that will begin at age 60. It is generally best to stick to the design and not take money out before age 60. That should certainly be the thinking unless there are other financial resources that will provide financial support beyond the age of 60.

Without knowing the age or circumstances of the particular situation of the questioner, I simply raise the following points that must be considered.

  1. Early withdrawals risk encountering the 10 year repayment rule. Any time there is a withdrawal any government contribution made within the previous 10 years must be repaid at a rate of $3 for every $1 of withdrawal. If the medical condition of the beneficiary deteriorates to the point that life expectancy is less than 5 years, then withdrawals of less than $10,000 are exempt the rule. Note that the design of the RDSP ensures that when the required draws at age 60 begin there can be no repayment required because no government money goes in beyond age 49. Specific to the question posed is that the government money deposited in 2008 cannot be withdrawn in 2018 if government money continued to go in after 2008. In most cases an RDSP opened in 2008 with government contributions continuing for 20 years to 2027 could not be freely withdrawn until 2038.
  2. Depending on the age of the beneficiary the maximum government contribution will require participation for at least 20 years. You risk missing out on 10 years of government contribution and on the additional investment growth. Remember the impact of “leverage”. For example, if an additional $1,500 contribution from the family triggers the maximum grant of $3,500 and if by keeping the RDSP open the beneficiary qualifies for the $1,000 bond, then the act of investing triggers investment grown of $300 [at 5% 6,000x.05=300]. That is a 20% rate of return on the $1,500 additional investment.
  3. If the government has put more money into the RDSP than the family, then taking money out early may trigger the government defined annual pension formula LDAP which must be continued until the plan is exhausted at age 83. Contributions to the plan can continue up to age 59 even if the LDAP withdrawals are taking place. If the contract with the financial institution allows discretionary payments called DAP’s they are simply one time withdrawals which do not require continuation.

A minor variation allows up to 10% of the balance to be withdrawn each year.

If the family has put in more than the government, the LDAP formula does not apply, and so yes, the entire amount could be withdrawn, minus the clawbacks, as the repayment rule still applies regardless of the proportion of personal versus government contributions. It is important to note that while it is permitted to withdraw such funds, it may be ill-advised, as you would be losing out on all the grants and bonds that have not yet had the opportunity to mature, and therefore would need to be repaid.

  1. In all cases, the proportion of the withdrawal representing the government money plus the investment growth is taxable to the beneficiary in the year of withdrawal.
  2. The $200,000 limit only applies to the amount of money put it from sources other than the government money (the grants and bonds). The plan itself has no limit to the growth possible through wise investment. Indeed, if the family has contributed the full $200,000 and has had a number of years of good investment growth, then it can reach a very comfortable nest egg. Use the RDSP Calculator to simulate the possibilities. https://www.rdsp.com/calculator/

 

Answer provided by Dan McDonald.

Dan is a Certified Professional Accountant with a PhD and is a former accounting professor at Simon Fraser University. He also has a daughter with an RDSP and is a facilitator for Plan Institute’s RDSP information sessions.

 

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