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Specified Disability Savings Plan – SDSP – How Does it Work ?

Let me preface this with, this stuff is complicated. I have read over the documentation, and this is my interpretation of what I have read. While it is important to have rules to ensure systems are not abused, this is a bit extreme. The SDSP (Specified Disability Savings Plan) is one of the exceptions possible in the RDSP program, keep that in mind. If you are unsure, call for help.

The Registered Disability Savings Plan (RDSP) has strict rules for withdrawals. The rules ensure that the RDSP “…cannot be used like a chequing account…”. That was a direct quote from an ESDC source.

I will be writing more about this, in the near future.

The rules for withdrawals are:

“Whenever money is withdrawn from an RDSP, all or part of the grants and the bonds that have been in the RDSP for fewer than 10 years must be repaid to the Government. You must repay $3 for every $1 that is taken out, up to the total amount of grants and bonds paid into the RDSP in the last 10 years. Repayments to the Government of Canada will be applied starting with the oldest grants and bonds paid into the plan first, and then towards the newest.”
ESDC RDSP Withdrawal page

Specified Disability Savings Plan SDSP

The specified disability savings plan SDSP, is a clause in the RDSP for disabled people with a shorter life expectancy. It allows families dealing with the imminent death of a loved one to extract money (early) from an RDSP (without penalties).

To get an SDSP, the beneficiary must have an RDSP.  A Doctor must attest the holder of the RDSP will most likely die within 5 years. The RDSP holder then must elect to convert their RDSP to an SDSP, and ESDC must approve this election.

Once the RDSP changes to an SDSP no further money can be deposited in the account. If money is deposited, the SDSP will revert back to an RDSP. In this instance all associated early withdrawal penalties, would come into play.

The maximum that can be taken out per year from the fund is $10,000.

This is one of the few exemptions for taking money out of your RDSP early. Remember the RDSP is a very long-term savings vehicle.

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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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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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RDSP : A Really Long-Term Savings Plan

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.

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Each year we receive an RDSP Statement of Grant Entitlement from the government. This statement tells us how much my son will receive in grants on his RDSP (for this year). There is also a statement about how much money that can be deposited in the account to receive these grants.

I have scanned the main information box that explains this.

RDSP Statement of Grant Entitlement 2019
My Son’s 2019 Grant Story

As you can see this is an important piece of information. I now know I can deposit $1020 in my son’s RDSP (this year) and it will be matched with $1020 in grants.

The reason these amounts are so low, is currently my son is under 18 years old. Due to his age, his “net income” calculation is based on my family income. Once my son reaches age 18 the income calculation that the statement of grant entitlements is based on, will be his income only. At that time, his grants should be much higher, due to his estimated income at that age.

When he turns 18, he 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.

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