Common RDSP misconceptions

Students at university campus — © simonkr / iStockphoto

This story was updated on March 5, 2020, to include family income thresholds for 2020.

The Registered Disability Savings Plan (RDSP) launched more than a decade ago, but there’s still confusion about some of the more intricate details.

One of the RDSP’s largest benefits is the “free” money that beneficiaries can receive from the government up until the end of the year they turn 49.

The Canada Disability Savings Grant is a matching program based on family net income. Until the year the beneficiary turns 19, family net income is based on the parents’ incomes; afterward, it’s based on the beneficiary’s income plus their spouse’s income.

These rules hold regardless of who the account holder is, whether the beneficiary is dependent on someone or where the beneficiary lives.

If the beneficiary qualifies for the maximum grant (family income is $97,069 or less), an annual contribution of $1,500 will provide an annual grant of $3,500, up to a maximum lifetime grant of $70,000.

For low-income families, the government also offers the Canada Disability Savings Bond. If a beneficiary qualifies for the maximum bond (family income is $31,711) or less), they receive $1,000 annually up to a lifetime maximum of $20,000, with no contribution required.

What is the assistance holdback amount?

The government wants RDSP accounts to be long-term investments. To discourage early withdrawals, it established the assistance holdback amount (AHA).

If a RDSP account is collapsed, the AHA applies, which means all the grant and bond amounts deposited to the account in the 10 years prior must be repaid to the government.

For partial RDSP withdrawals, the account holder repays $3 of any grant or bond received in the 10 years prior for every $1 withdrawn.

This holdback amount is often misinterpreted. Clients assume they can access the grant or bond they received more than 10 years ago that’s no longer subject to the AHA. That’s not true. While the grant or bond received more than 10 years ago belongs to the beneficiary, they’re unable to access it unless the entire account is collapsed, or no grant or bond has been deposited to the account in the 10 years prior to the withdrawal.

When can a RDSP be collapsed?

If a beneficiary passes away or loses the Disability Tax Credit, a RDSP can be collapsed.

Many advisors and investors believe the RDSP account can be collapsed at any time, but this may not be the case.

If the account has more private contributions than government money, there’s no limit to the maximum amount that can be withdrawn.

If the RDSP is a primarily government-assisted plan (government grant and bond payments exceed private contributions), the maximum amount that can be withdrawn annually is the greater of 10% of the account or the lifetime disability assistance payment (LDAP) formula. Below is an example of the LDAP formula.

LDAP withdrawal = A ÷ (3 + B − C)

A = fair market value of the plan at the beginning of the year

B = greater of 80 and the beneficiary’s age at the beginning of the year

C = beneficiary’s age at the beginning of the year

If the beneficiary is age 60 and has $400,000 in the account at the beginning of the year, the LDAP withdrawal amount would be:

$400,000 ÷ (3 + 80 − 60) = $17,391.

In this case, 10% of the account is greater than the LDAP withdrawal amount.

Can a beneficiary designation be added to a RDSP?

It’s not possible to add a beneficiary designation to a RDSP account. When an RDSP beneficiary passes away, the RDSP is paid out to the beneficiary’s estate. As mentioned above, if the grant or bond was contributed to the account in the 10 years prior to the closure, it must be repaid to the government. The balance is paid to the beneficiary’s estate.

If your client has capacity and is age of majority, you may want to encourage them to write a will as a way to determine how the proceeds of the account will be distributed. This may also be a great time to discuss powers of attorney.

If they don’t have a will, account proceeds will be distributed as per the provincial rules of intestacy. Note that, since account proceeds are paid to the estate, it’s not possible to avoid probate on a RDSP account.