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When to Put Money in RRSP

I have come up with a relatively straight forward heuristic on how to figure this one out.

heu·ris·tic adjective
enabling a person to discover or learn something for themselves.”a “hands-on” or interactive heuristic approach to learning”

Google Dictionary description

It is a simple trickle down or waterfall decision tree. Many times I get asked this question, or see it float by in other sites.

Personal Finance Waterfall

Where to Put Money Heuristic

  1. Pay off debt , it has the highest guaranteed pay back today.

    I mean all debt except perhaps your mortgage. A mortgage is your biggest debt, so my view is investing elsewhere, and not paying down your mortgage is a mistake. I have been told my opinion is very “old fashioned”.
    • This lowers your risk in life and gives you choices.
  2. Put money in your TFSA.

    My opinion is that this is a good place to put your money. How you invest it, is up to you. It should be within your Risk tolerances. Whether you want to buy stocks, Index Funds, ETFs or mutual funds is up to you. Do this in a trading account. In a trading account you can buy all those savings vehicles. In a Mutual Fund account, you usually can only buy Bank or Insurance company (read high MER) funds.

    TFSA until you reach your limit. You find that in your My CRA Account (limit as of start of current year).
  3. Do you have Kids? If you do, maybe it is time to think about an RESP? This could be, before (2). The Registered Education Savings Plan will help your child’s future. You may decide you don’t want to do this, so you could skip this step.
  4. Do you have a disabled loved one? Before step (1) you might want to think about an RDSP. A Registered Disability Savings Plan will help their future a great deal.
  5. Time to use your RRSP. It will lower your tax levels, so you should reinvest the money you get back into the RRSP, until you have no RRSP limit left.

    Sometimes you can’t use your RRSP, if you are lucky enough to have a Pension. This is a tragedy of riches, so don’t complain to your friends about it, or they might kick you in the shins.
  6. You have reached savings nirvana. If you are at this point where:
    • All your debt is paid off
    • Your TFSA limit is reached
    • Your RRSP is full
      You are now at the Zen level of life.

At this point in your life you have choices that most folks don’t have. Your Risk level should be quite low. Your stress level (due to money) should be non-existent.

This is your goal. Being out of debt, with money in the bank means you are financially in the right place. You can do what you want.

Am I Done ?

If you somehow get back into debt, restart the process. You did it once, you can do it again. Maybe create (say after step (1)) an Emergency Fund, in case something bad happens.

Is this easy? No, however, it is a good heuristic.

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RDSP : Quick Points

Tom Drake interviewed me a while ago, and we were going to chat about the RDSP (Registered Disability Savings Plan). We did end up mostly talking about the Disability Tax Credit (DTC), but it was still a very fun time for me. Whether Tom enjoyed it, remains to be seen.

I offer you up my notes, that I attempted to use during the interview, they are a bit scattered, but still informative, I hope.

Social Insurance Number

A social insurance number is a must for most government programs.

  • Whoever is involved in this, must have a SIN (and be a Canadian Resident). First thing to do, and these days it is usually applied for when a child is born.

DTC

The Disability Tax Credit is the cornerstone of the whole thing. Without it, you are not disabled (in the eyes of the Government).

  • You can do nothing with an RDSP until you have a DTC . The Disability Tax Credit (DTC) is granted by the CRA. 
    • Typically you apply for it, outside of your normal Tax return
    • This must be a severe and prolonged disability that disrupts the persons day to day life in a significant way.
    • It can be granted on a temporary basis and may need to be reapplied for, which we have done for my son, and will have to do again.
  • The RDSP can only be opened once the CRA grants the DTC (and yes they can deny it at a later date, depending on things).
  • You can do it yourself, don’t use the “helping firms” out there. So many different medical folks can help with this (e.g. Nurse practitioners)

RDSP Overview

What is a Registered Disability Savings Plan? Lots of parts to it.

  • The government has designed this as a very long term savings plan (until someone turns 60 is the goal). Employment and Social Development (ESDC) are the policy setters for the program. Check their web site for information.
  • A program’s maximum contributions over the life of the RDSP,  $200K
  • The total grants paid per year will be $3500 and a total of $70K throughout the life of the plan.
  • The entire program’s maximum age for someone to apply for an RDSP, should be 49 years old, since at 59 they can no longer contribute to it.
  • The plan can start paying out at age 60.
    • It can pay out earlier in extenuating circumstances 
    • The RDSP turns into a Specified Disability Savings Plan, when someone has a Doctor write a medical certificate stating that the payee will most likely die with in the next 5 years.
  • These funds in the RDSP should not be part of any Bankruptcy. I have been assured by the ESDC that this is the case, however, the bankruptcy law does not mention Registered accounts in general and the RDSP in specific as exempt.

Opening an RDSP

  • Who offers something other than a Bank Mutual Fund based RDSP? Currently most banks offer versions of the RDSP, however, few offer much flexibility.
    • TD Waterhouse (Directline) is where I currently invest. It offers complete flexibility in terms of where money can be invested (e.g. ETFs, Stocks, GICs, etc.,)

Grants

  • Typically the grants offered are based on the parents income, until the child turns 18. After that the level of grants will be based on the childs income
    • Canada Disability Savings Grant (CDSG) is a response to a deposit in the account, the amount of the grant (and the maximum value for the year), is set every year in the Statement of Entitlement.
    • Canada Disability Savings Bond (CDSB), an amount paid yearly into the RDSP for extremely low income beneficiaries. If you have low income, and RDSP is still a good option for long term savings.

DTC Revocation

If the beneficiary loses their DTC, a new rule has been added in the past year that does not force them to collapse their RDSP, they can hold onto it for now, while they reapply for the DTC.

LDAP

Lifetime Disability Assistance Payment is a payout from the RDSP to someone who has reached the age of 60. This is how the money is normally dispersed from an RDSP.

DAP

You can withdraw money from your RDSP before you turn 60, however, it is not encouraged.

  • Disability Assistance Payment, is a withdrawal. It is a payment made from an RDSP to the beneficiary or their estate.
  • DAPs typically will have AHA involved, as penalties, for early withdrawals.

SDSP

This is one of the instances where money can be taken out of an RDSP early.

  • Specified Disability Savings Plan (SDSP) happens when the beneficiary has a short life span (less than 5 years), and this must be certified by a Medical Practitioner (Doctor or Nurse Practitioner).
  • This is reversible, however, there is a lot of work that needs to be done in that case.

PGAP

Primarily Government Assisted Plan is an RDSP where most of the funds contributed to it, was from the Government. This RDSP scenario has many rules about early withdrawals (which can happen, but may not be worthwhile).

AHA

These are the penalties for taking money out early.

  • Assistance Holdback Amount, the penalties paid if someone attempts to withdraw money early. Typically it is $3 for each dollar withdrawn, up to a maximum of the amount of Grants paid into the RDSP for the past 10 years. 
  • In the case of a PGAP, there are even sterner rules.
  • There is a methodology for getting funds out earlier than at age 60, but it is quite complex, and assumes a 10 year plan before doing the withdrawal.

British Columbia Autism 

Milburn Drysdale’s site is the go to for RDSP information, especially if you live in BC.

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More RDSP Talk

A while ago I spoke with Tom Drake at Maple Money about the DTC and RDSP. After some judicious edit’ing Tom has published the Podcast here. As usual you can read about the RDSP on my Registered Disability Savings Plan page.

For those unaware there are a bunch of very smart folks that I use for research on this topic (my wife being a major contributor), and whenever I do one of these talks, I get a few things not quite right (and this is no difference). My source at ESDC (who is very patient and kind) points out a few of my fumbles: I mention that the program is 10 years old, it was started in 2008, so that is a 12 years in 2020.

RDSP and Bankruptcy

Doug Hoyes and I have discussed (on his Podcast) about the topic of RDSPs and bankruptcy, but my source now states clearly:

“The Bankruptcy Act was changed last year through the Budget Implementation Act.‎ See 67(1)(b.3) of the Insolvency and Bankruptcy Act.”

ESDC Source

134 Paragraph 67(1)‍(b.‍3) of the Act is replaced by the following:(b.‍3) without restricting the generality of paragraph (b), property in a registered retirement savings plan, a registered retirement income fund or a registered disability savings plan, as those expressions are defined in the Income Tax Act, or in any prescribed plan, other than property contributed to any such plan or fund in the 12 months before the date of bankruptcy,

Bill C-97

RDSP After DTC Lost

If the beneficiary loses their Disability Tax Credit (DTC), it used to be that the RDSP had to be closed. I waffled around this one with Tom, but the actual answer is:

“As of Budget day 2019, a RDSP n‎o longer is required to be closed due to loss of DTC. During a period when the beneficiary in not DTC eligible no contributions can be made to the plan except for the rollover of funds from a RRSP of a deceased parent or grandparent upon whom the beneficiary was dependent.  During a period of DTC eligibility, the beneficiary will not accumulate annual grant or bond entitlements. The Assistance Holdback Amount will be determined as the ten year period immediately prior to the beneficiary being DTC ineligible, and will remain that period until the end of the year the beneficiary turns 50. Each subsequent year the AHA will decrease by a year. (51-9 years, 52-8 years,… 59-1 year). The year the beneficiary turns 60, the AHA is nil. Should the benficiary requalify for the DTC, the plan will operate as normal.”

ESDC Source

So the money hangs around until the person turns 60 and then can be withdrawn, as Tom Drake pointed out should be the case.

Each time I talk about the Registered Disability Savings Plan and DTC I end up learning more myself.


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Every year, an RDSP holder gets an update about how much money can be put into their RDSP. The statement of Grant Entitlement, says how much money and how much the government will match, with a Grant.

Statement of Grant Entitlement
My Son’s Statement of Grant Entitlement

As you can see this is an important piece of information. I now know I can deposit $1000 in my son’s RDSP (this year) and it will be matched with $1000 in grants.

This amount will increase once my son is over the age of 17, as the income they will use to determine the grant will be his income, instead of our household income. When he turns 18, his grants should be much higher, due to his estimated income at that age.

When he turns 18, my son will also have to re-qualify for his Disability Tax Credit as well. This is what we learned from the last time he had to re-qualify.

Previous Posts on Grant Entitlements

  • 2019 Statement of Grant Entitlement
  • 2018 Grant Discussions

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RDSP and Budget 2019

Budget 2019 is finally out, and it has a whole treasure trove of goodies. It is truly an election year budget with promises of the future (if you reelect the current government).

I will allow much smarter folks to comment on other areas, but for Registered Disability Savings Plan there are two nice mentions.

RDSP Exempt from Seizure in Bankruptcies

Doug Hoyes and I talked about this on his podcast, but now it looks to be officially in grained in the system.

“Unlike RRSPs, amounts held in RDSPs are not exempt from seizure by creditors in bankruptcy. To level the playing field, Budget 2019 also proposes to exempt RDSPs from seizure in bankruptcy, with the exception of contributions made in the 12 months before the filing.” 

Budget 2019 Canada

I assume the bankruptcy laws may be changed one day, but this seems quite clear. The past 12 months of payments being not exempt makes sense as well.

RDSP Pay Back if DTC Lost

This has always been a big problem, and with the CRA cancelling DTCs left and right this is a good thing.

“To address concerns that this treatment does not appropriately recognize the financial impact that periods of severe, but episodic, disability can have on individuals, Budget 2019 proposes to eliminate the requirement to close an RDSP when a beneficiary no longer qualifies for the DTC. Doing so will allow grants and bonds otherwise required to be repaid to the Government to remain in the RDSP. To ensure fairness for DTC-eligible beneficiaries, some restrictions on access to these amounts will apply. The estimated cost of this measure is $109 million over five years, beginning in 2019–20, and $33 million per year ongoing. “

Budget 2019

Previously you had a short period of time where you had to pay back all grants and bonds, now you can leave the money there. I assume if you try to take money out you would have to pay back grants and bonds (and pay tax on any growth). There still is a few fine points to clarify here.

RDSP Not Forgotten

Glad to see the RDSP is not forgotten in the budget. Curious to see what the Loyal Opposition has to say about these areas come election time?

Epilogue

Yes, this is now law with the passing of the budget in 2019.

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