Question:

Many people started their RDSP in 2008 and their 10 year time is soon up. This has been a great thing, but now what? What are some of your suggestions? How can I use this lump sum to own accommodation? What taxes do I pay if I withdraw this lump sum after 10 years? If I leave the money in the plan, what happens if the total goes over 200,000$ 

 

Answer:

I urge caution and careful analysis. The blueprint for the RDSP was an idea of PLAN parents concerned with what would happen to their son or daughter with a disability when they died and their ongoing financial support ended. Many persons with disabilities do not have trust funds and many will not have worked very long or for organizations with a pension plan. The RDSP is designed to provide the equivalent of a pension plan that will begin at age 60. It is generally best to stick to the design and not take money out before age 60. That should certainly be the thinking unless there are other financial resources that will provide financial support beyond the age of 60.

Without knowing the age or circumstances of the particular situation of the questioner I simple raise the following points that must be considered.

1. Depending on the age of the beneficiary the maximum government contribution will require participation for at least 20 years. You risk missing out on 10 years of government contribution and on the additional investment growth. Remember the impact of “leverage”. For example, if an additional $1,500 contribution from the family triggers the maximum “grant” of $3,500 and if by keeping the RDSP open the beneficiary qualifies for the $1,000 “bond”, then the act of investing triggers investment grown of $300 [at 5% 6,000x.05=300]. That is a 20% rate of return on the $1,500 additional investment.

2. If the government has put more money into the RDSP than the family, then taking money out early may trigger the government defined annual pension formula LDAP which must be continued until the plan is exhausted at age 83. Contributions to the plan can continue up to age 59 even if the LDAP withdrawals are taking place.

A minor variation allows up to 10% of the balance to be withdrawn each year.

If the family has put in more than the government, then yes the entire amount could be withdrawn.

3. In all cases, the proportion of the withdrawal representing the government money plus the investment growth is taxable to the beneficiary in the year of withdrawal.

4. The $200,000 limit only applies to the amount of money put it from sources other than the government money [the “grants” and “bonds”]. The plan itself has no limit to the growth possible through wise investment. Indeed if the family has contributed the full $200,000 and has had a number of years of good investment growth, then it can reach a very comfortable nest egg. Use the RDSP Calculator to simulate the possibilities. http://www.rdsp.com/calculator/

 

Answer provided by Dan McDonald.

Dan is a Certified Professional Accountant with a PhD and is a former accounting professor at Simon Fraser University. He also has a daughter with an RDSP and is a facilitator for Plan Institute’s RDSP information sessions.

For more information on the RDSP: