Once again, I will try and do the impossible and explain the types of payments you can take out of an RDSP in a clear and understandable way. For any of you who have been visiting this blog often and following the progression of the RDSP, you know that this is not an easy task. The terminology and formula’s associated with payments from an RDSP often create confusion amongst people trying to learn about the plan.
So, wish me luck.
In this post I will refrain from using the official terminology of Disability Assistance Payments (DAPs) and Lifetime Disability Assistance Payments (LDAPs), and instead break down the different types of payments into 5 categories or scenarios. I will define what I mean by the “10 year rule” for those of you who are unfamiliar.
10 year rule = if you receive any payments from the federal government in the form of the grant or bond, you will need to wait at least 10 years after the last grant or bond has been received before you start withdrawing from the plan. If you decide to withdraw before this ten year waiting period is up, you will have to pay back any grant or bond that has been received in the last ten years (not including interest).
Payment formula = some payments out of the RDSP must come out as determined by a formula. This formula (simplified) is “Total Amount in the plan” / divided by “Years expected to live”. ** Note that this is not the full formula, just a simplified version for clarity.
The Five Ways You Can Receive Payments:
1) No Federal Contributions: If someone opens up an RDSP and only contributes their own money into the plan (or the money contributed by friends and family) there are no restrictions on when you can withdraw from the plan or how much. Once you turn 60 years of age, minimum annual payments will need to start coming out of the plan, but you are still allowed to take out as much as you want, whenever you want. In this scenario you do not have to worry about the assistance holdback amount (or as we call it, the ten year rule).
Example – David decides that he will only put in his own money and deposits $15,000 at the age of 52. David could withdraw payment from the RDSP at any time and in any amount. At the age of 60, formula payments would begin coming out of the RDSP, but David could still take out larger amounts.
2) Annuity: If you would like to have even payments paid out over your lifetime, there is a provision in the legislation to allow for annuity payment. An annuity is where you make a lump sum payment to a financial institution who then pays you income for the rest of your life. In this case, you must still be conscious of the 10 year rule.
Example – Sarah’s family opened up an RDSP for her when she was 10 years old and contributed $1,500 every year. Once Sarah turned 40, she wanted to receive the same amount in payments every year and took out an annuity from a life insurance company that pays her $7,000 a year.
3) More Personal Contributions than Federal Contributions: If you (and friends and family) have put in more contributions into your RDSP than the federal government, you are allowed to take out lump sum payments above and beyond the formula. These lump sum payments will not start an annual payment and can be received before the age of 60. Once you reach the age of 60, minimum payments as determined by the formula above will begin to come out annually, although you can still take out lump sums larger than the amount determined by the formula. You will still need to take into account the 10 year rule for these payments.
Example – Katy and her friends were able to contribute $100,000 over 30 years by the time she was 45 and received $70,000 in federal Grant. Katy decides at 45 that she wants to take out $30,000 towards a down payment on an apartment. She withdraws the payment without causing an annual payment to occur.
4) Less Personal Contributions than Federal Contributions: If you have contributed less than the federal government into your RDSP, you can never take out payments that exceed the amount determined by the formula. With this type of payment you must always take into account the 10 year rule. Within this scenario there are three options:
- You wait until 60, at which point payments determined by the formula are paid out each year.
- You decide you want to start receiving payments before the age of 60, and you start the annual payments early. Ex. John decides at 55 he wants to start receiving annual payments determined by the formula, and thus instigates these payments.
- You decide you want to receive a one-time payment that will not instigate annual payments (between the ages of 27 and 58). Because you have contributed less than the federal government, you can take out a one-time payment but it cannot exceed the amount determined by the formula.
Example – Since he turned 19, Tim has only ever received the $20,000 in Federal Government Bond. Tim decides at the age of 56 that he wants to start receiving payments from his RDSP. At this point, payments as determined by the formula begin to come out every year.
5) Shortened Life Expectancy: If the person has a shortened life expectancy (within 5 years) the formual does not apply and they can take out payments of any size. ** Must still adhere to the 10 year rule.
Example – Connie had an RDSP set up for her when she was 10 years old, and her parents have deposited $1,500 into her account every year for 10 years allowing her to get $35,000 in Grants. At 30 years old, Connie finds out she has less than 5 years to live. Her doctor certifies this diagnosis for the Canadian Revenue Agency, and Connie starts taking out payments of any size from the plan.
Important – It is up to the financial institutions as to whether they will allow lump sum payments (other than the formula payments) to come out of the plan. It is important that you speak with your financial institution and make sure they allow you to take out these types of payments if this is how you want to use the RDSP.
Please let me know if this explanation is clear and understantable. If it is not, I will keep trying until it is. Thank you again to everyone for all your feedback. I hope this has been helpful.