From December 2008 to December 2010, Canadians opened 41,060 RDSP’s, which represents only 9% of the eligible population.

So why have the existing 91% of Canadians not accessed the RDSP?

Throughout the summer, we’ve been discussing the possible barriers to accessing the RDSP.  But before we launch into the final barrier – it’s important to acknowledge that we’ve been talking A LOT about “barriers”, and maybe we should have named this series as “Top Ten Possible Adjustments” or “Top Ten Opportunities for Change” because we are really talking about tweaking the RDSP and making adjustments to an existing policy. Your survey comments have made us realize this when people have said: “I don’t think any changes are needed – we should be grateful to the Government for starting the RDSP!”

Still, less than 10% of the eligible population has accessed the RDSP and the majority of survey respondents have identified that the number one barrier to the RDSP is the 10-year rule.  Families have told us: “10 years is too long to wait”, and that “ people with disabilities have different needs – most of us wont live as long and we need to access our savings earlier”.

So here we go:

The policy in the box:

  • If a person receives grants or bonds from the government, they must wait 10 years after the last contribution in order to withdraw money from their RDSP account
  • In other words – the RDSP is a (very) long-term savings plan
    • Paul is 20 and has just opened an RDSP
    • He wants to access the full grant or bond (and not return any funds to government) so he must wait 30 years from the time of making his first deposit before accessing his (or the government’s) contributions – 20 years of contributions plus 10 years of waiting for the holdback amount to diminish to 0.
    • Paul must wait until he is 50 years of age to access his RDSP savings

Why is there a 10-year rule?

It’s important for us to understand why this rule exists in the first place.  There are two main reasons:

  1. To prevent tax “slippage”:  a person could use the same money to get government contributions year after year.  For example, Paul contributes $1,500 in 2008 and receives a matching $3,500 from the federal government.  In 2009, he withdraws $1,500 from the RDSP and then re-deposits it.  Paul gets another $3,500 from the federal government.  In other words, he would receive $7,500 from the federal government for his $1,500 contribution.   That would defeat the purpose of encouraging personal saving.
  2. To make the RDSP a long-term savings plan:  The RDSP was not intended to act like a bank account, where a person could make contributions and withdrawals as needed.  Nor was it intended to act like an income program, where federal contributions are considered an income supplement each year.

The question remains: Is it possible to achieve these two public policy goals while at the same time reducing the 10-Year rule?

We think so.

As we’ve discussed in previous blogs, there may be a need to call for parity or parallelism between the RRSP and the RDSP.  People who have an RRSP are given an opportunity to withdraw money for real estate or educational purposes, tax-free.  Could there not be something similar for the RDSP?  For example, if someone wanted to buy a new home, or make an important medical equipment purchase could they make a special withdrawal from their RDSP and not be penalized?   Perhaps there could be a maximum number of times one could make withdrawals in a lifetime and as well as a maximum withdrawal amount.

Some of you have suggested to decrease the 10-year rule to 5-years or 2-years. Recently Minister Flaherty did make some changes to this rule in the latest federal budget, by reducing the 10-year rule to 5 years if and only if, the beneficiary has 5 years or less to live. This is a step in the right direction and shows the willingness of the Canadian Government to make adjustments to the RDSP. However, as many of you pointed out in the survey – most of us don’t know what the future holds, and seems reasonable to be able to access saved funds when they’re needed most.

What do you think about the 10-year rule? Also, If you haven’t already, let us know what you think by taking a few minutes to fill out our RDSP 3 Year Review Survey here! The survey is going to close in a few weeks and we need to hear from you!

13 Responses to “RDSP #1 Barrier: The 10-Year Rule”

  1. jmoss

    For more information about the 10-year rule and other helpful information about the RDSP…check out this great resource:

    http://www.jackstyan.com/my-blog/2011/05/the-holdback-amount-aka-the-ten-year-rule.html

    Reply
  2. Anya

    I’m still unclear about the 10-year rule, as I am receiving conflicting information between this site and my bank rep who opened up my RDSP. Let’s say I’ve been receiving the full bond and grant on an annual $1500 contribution for 10 years. In Year 11, do I now have access to the total amount from Year 1 (my $1500 contribution+grant+bond), it now having been there for a full 10 years?

    Reply
  3. jmoss

    Our understanding is no, you cannot access the total from Year 1. Rather, you must wait 10 years, after the last government contribution is made. See the below statement of the Government HRSDC website:

    “Whenever money is withdrawn from an RDSP, all grants and bonds paid into the RDSP during the 10 years before the withdrawal must be repaid to the Government” (http://www.hrsdc.gc.ca/eng/disability_issues/disability_savings/withdrawals.shtml)

    Withdrawals from your RDSP are called “payments” and ANY payment is made from an RDSP, then there is a holdback amount – payable to the federal government for the grant/bond contributions. After 10 years, the holdback amount is zero and payments may be made without repaying any funds to the federal government.

    Reply
  4. Joe Smith

    This example I believe is incorrect. The example is “The policy in the box:

    If a person receives grants or bonds from the government, they must wait 10 years after the last contribution in order to withdraw money from their RDSP account

    In other words – the RDSP is a (very) long-term savings plan
    Paul is 20 and has just opened an RDSP
    He wants to access the full grant or bond (and not return any funds to government) so he must wait 30 years from the time of making his first deposit before accessing his (or the government’s) contributions – 20 years of contributions plus 10 years of waiting for the holdback amount to diminish to 0.
    Paul must wait until he is 50 years of age to access his RDSP savings

    I believe Paul must wait until age 59 since he is making contributions up to age 49.

    Reply
  5. jmoss

    You’re correct – he must wait 10 years after his last contribution, at age 49. Paul is 59 when he can access his funds without penalty.
    Thanks for noticing this!

    Reply
  6. Ted Norton

    You’re assuming that Paul continued to make contributions beyond age 40 and up to age 49. If Paul is 20 years old and makes 20 years of contributions at $1500/year, assuming he is eligible for maximum grant and bond money, Paul will have received $3500 in grant money for 20 years (i.e. $70,000) and $1,000 in Bond money for 20 years (i.e. $20,000) and would thus have reached the lifetime limit for grant and bond money. Although Paul could continue to contribute his own funds to his RDSP until age 49, without any more grant or bond money coming his way, he has little incentive to do so. So, the chances are Paul would stop making personal contributions at age 40, wait out the next 10 years until he is 50 years old and then withdraw RDSP money starting at 50 years old without penalty.

    Reply
  7. andrew g

    you don’t HAVE to wait 10 years

    you can close out the account get all the money and just repay the grant/bond in the account less than 10 years

    Reply
  8. Chad

    I wanna make sure I have it correct

    If I put $20,000 into rdsp. The government matches
    To total of $40,000 correct?

    If so after one year the government gives $3500
    To be nice.
    The account should then have a total of $43,500

    If I take out money how much of it goes back to the government?
    $3500?

    Reply
    • jcrocker

      Hi Chad,

      You don’t quite have it correct. See here for info on matching: http://rdsp.com/2013/01/29/updated-income-numbers-to-determine-grant-and-bond-amounts/

      Basically:

      If the beneficiary’s annual family income is less than or equal to $87,123 for 2013, the Government of Canada pays:

      a 300% Grant on the first $500 in annual contributions made to an RDSP and
      a 200% Grant on the next $1000 in annual contributions.
      If the beneficiary’s annual family income exceeds $87,123 for 2013, the Government of Canada pays:

      a 100% Grant on the first $1,000 in annual contributions made to an RDSP.

      As for the possible penalty: There will soon be a new Proportional Repayment Rule. Instead of ALL grant and bond money being paid back if ANY withdrawal took place for the 10-year period after a government contribution (like it currently is) — As of Jan 1, 2014 within that same 10 years, for each $1 taken from an RDSP, only $3 of any grants or bonds paid into the plan would need to be repaid, up to a maximum of the assistance holdback amount.

      Reply
  9. R. Paquet

    I started contributing to an RDSP for my son who is 14 last year, but the government says I can now go back as far as 2008 to carry-forward, which if I do makes him 10 when he stared to contribute. Am I right in assuming that if I continue to make contrubutions up until 2028 I will have maxed out the governments grants when he is 30 and not 34, and thus will only have to wait until he is 40 to retrive the money without penility for him?

    Reply
    • jcrocker

      Hi,Yes, if you max out the grants ($70,000)in 20 years, starting from 2008, and are either not receiving the bond, or have maxed it out too ($20,000), then indeed, you would only need to wait an additional 10 years before accessing the funds without penalty.

      Reply
  10. Pamela Kinney

    This is so confusing- no one made me aware that this was available for me I have been on ODSP most of my adult life due to having uncontrollable seizures- grandmal or generalized tonic-clonic seizures. I got my RDSP opened on April 10, 2013 at 48yrs of age. Will the government continue to match three dollars to my one dollar after I turn 50? I feel that it was unfair that at the very least ODSP should have given me the heads up years ago that this was available for me. I hope the government will continue to match my money as I will need all the help I can get in my elderly years to help me keep a roof over my head and food on my table. I have lived month to month on my disability never able to put away for my future not really looking that far ahead until I was able to get this RDSP. But with my epilepsy it is hard for me to retain all the in and outs the dos and don’ts that apply to this. Could someone help refresh my memory on how this matching process works and for how long?

    Reply

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