in rdsp

The buzz-phrase for investing has always been, “Invest for the long-term”. The RDSP (Registered Disability Savings Plan) is actually designed with that concept in mind. It is a really long-term savings plan, and the penalties set up for early withdrawals enforce this vision.

The way the system is set up, money should go in until the beneficiary reaches age 5759, and then it can act as a source of income for the beneficiary at age 60.

With my latest Statement of Benefits update from the Government, came a very useful example of how early withdrawals work. Given the RDSP is 10 years old, some folks may start thinking about withdrawing money, so they gave an example of how that might work.

I don’t suppose they would mind if I borrowed it to show how early withdrawal penalties work:

Reminder Notice -10-Year Anniversary

From the RDSP statement of benefits I received in 2019, most likely written by the Government of Canada, so blame them if the example seems a little confusing.

As of 2019, some beneficiaries will have had an RDSP for 1O years, and may be starting to think about taking money out of the plan. It is important to remember that the money the government deposited into an RDSP must remain there for at least 1O years after the last government contribution was made to the plan. If money is withdrawn before this time, all or part of the government contribution must be repaid to the government.

Whenever you take money out of the plan, you will be subject to one of the following repayment rules:

  1. return $3 of government grant and bond for every $1 that you withdraw from the plan (proportional repayment rule), or
  2. return all the government grant and bond you have received in the last 10 years; whichever of these two amounts is less.

Example of Grant and Bond Repayment:

James opened an RDSP in January 2009 and contributed $1,500 that year and for each subsequent year. He also received the maximum grant and bond in 2009 and for each subsequent year. As of January 1, 2019, there are total assets of $65,000 in his plan, which consists of $45,000 in grant and bond, $15,000 in personal contributions and $5,000 in interest/earnings. The assistance holdback amount for his RDSP is $45,000, which is the total amount of grant and bond that the Government has contributed in the past 10 years.

On February 1, 2019, James wants to withdraw $10,000 from his plan. Given the proportional repayment rule, if he withdraws the $10,000 in February 2019, then $30,000 of the grant and bond amount must be repaid to the government. Therefore, if James withdraws $10,000, the grant and bond that would remain in his account after the repayment would be $15,000 ($45,000 – $30,000). This means that the total assets in James’ plan would be reduced to $25,000 (i.e. $65,000 total minus $10,000 withdrawal and less

$30,000 in grant and bond repaid to the government). Below is a graphic representation of what would happen to the overall total assets before and after the $10,000 withdrawal.

Early RDSP Withdrawal Graphic
You Lose A Lot With an Early RDSP Withdrawal

As you can see, a $10,000 withdrawal will cost $40,000 in this example.

Don’t Take Out Money Early?

There are exceptions for early withdrawals, that I will outline soon. Once the plan recipient turns 60 withdrawals are controlled as well. As usual none of this is straight forward.

For now view the RDSP as a very long-term savings plan.

{ 7 comments }

  • smayer97 March 11, 2019, 2:30 PM

    One thing to note that caught my eye about early withdrawal when I first read about this is that there may be times when the person does NOT qualify for the full grant and bond, based on any earned income. Yet with early withdrawal, the penalty is based on the maximum amount that may be granted, regardless if you received that much.

    In other words, if you only qualified to receive $2 for every $1 deposited into the plan in any given year, the payback to the government is still $3 for every $1 withdrawn.

    This is unlike the RESP whereby only the amount received from the government need be paid back with any early withdrawal.

    Reply
    • bigcajunman March 11, 2019, 5:06 PM

      I believe it is the maximum of two values, one of them being, “all the money in grants and bonds we gave you”.

      Reply
  • smayer97 March 11, 2019, 9:34 AM

    What service do you use? Still looking for a good quality one with flexibility and reliability. The best I can gather for self-directed is that TD Bank comes out on top. Not sure about non-self-directed. Any feedback, insight, tips, etc?

    Reply
  • athletickatKC March 11, 2019, 9:27 AM

    There’s a typo in the age. It should be 59, not 57.

    Reply
    • bigcajunman March 11, 2019, 9:31 AM

      Correct, not sure why I had 57 in my head… will correct.

      Reply

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