Payments from RDSPs
Most people don’t have to worry about withdrawals or payments from Registered Disability Savings Plans right away because they will use the RDSP to build wealth for “future” financial security. But if you want to know how well the plan will work for you or your loved one, you need to understand any limitations on withdrawing money from your RDSP.
When thinking about payments, you need to consider the federal rules governing payments from RDSPs as well as local provincial rules that might affect a beneficiary’s provincial disability benefits.
RDSP Payment Rules
There are two types of payments that can be made from RDSPs:
1. Disability Assistance Payments – any payment made from the RDSP to the beneficiary.
2. Lifetime Disability Assistance Payments – a special type of payment that must continue at least once a year after they begin. These payments can begin at any age but they must begin when the beneficiary turns 60 years.
Lifetime Disability Assitance Payments are limited to an annual maximum amount based on the beneficiary’s life expectancy and the value of the plan. This amount is determined by the following formula:
Total value of RDSP/(Life Expectancy + 3 – Beneficiary’s Age) + Annuity Payments
Unless a doctor has said in writing that a beneficiary is not likely to live more than five years, life expectancy is set at 80 years. This means that in most cases the formula will be:
Total value of RDSP/(83 – Beneficiary’s Age) + Annuity Payments
You’ll notice that as the beneficiary gets older, the size of the payments grow. You can, however, use annuities so that the payments are the same from year to year.
For example, let’s assume Stephen has $100,000 in his RDSP at the age of 60.
Option 1: Lifetime Disability Assistance Payments Calculated by the formula
Stephen’s payment would be calculated as follows:
Year 1 $100,000 / (83 – 60) = $4,347
Year 2 $100, 913 (assuming income at 5.5%) /(83-61) = $4,587
Until age 82 where a final amount of more than $15,000 would be paid out.
Option 2: Purchase of a Life Annuity
If Stephen purchased a life annuity with the $100,000 in his plan, then he could receive payments of approximately $7,000/year (assuming income rate of 5.5%) from his RDSP for the rest of his life.
RDSPs must ALWAYS keep enough money in the plan to cover the government “holdback amount”. The holdback amount is the total amount of Grants and Bonds received in the last ten years.
What if you don’t apply for the federal Grant and Bond?
If you waive the federal Grant and Bond, the RDSP permits completely flexible withdrawals. There is no holdback period or amount, you can withdraw as much or as little as you want, except that once the Beneficiary turns 60, Lifetime Disability Assistance Payments must begin.
What if the Family & Individual Contribution exceeds those of Government?
If family contributions exceed government contributions (Grant and Bond), withdrawals of any amount can be made at anytime, except:
▪ They can not be greater than the holdback amount
▪ Any Grant or Bond received within ten years must be repaid
▪ Lifetime Disability Assistance Payments must begin at age 60 years
If family contributions exceed government contributions (Grant and Bond) and ten years has passed since the last government contribution, payments of any amount can be withdrawn for any purpose without penalty.
What if the Government Contributions exceed those of the Family & Individual?
If government contributions (Grant and Bond) are greater than those of the family and individual, then:
▪ Disability Assistance Payments can be made before the beneficiary is 60 years of age, but maximum annual withdrawals will be limited to the Lifetime Disability Assistance Payment formula.
▪ Once the beneficiary is 60 years of age, the total amount of Disability Assistance Payments must be equal to the Lifetime Disability Assistance Payment formula.
▪ If the beneficiary is between 26 and 59 years, he or she has the right to request Disability Assistance Payments from the RDSP. These payments must not exceed the Lifetime Disability Assistance Payment formula.
What if your relative has a shortened life expectancy?
If your relative’s doctor certifies in writing that the beneficiary’s health is such that the beneficiary is not likely to live more than five years, then there will then be no maximum limits on the amount of disability assistance payments that can be made to the beneficiary in a specified year (except the holdback amount).
These five years are referred to as specified years.
Disability income assistance programs in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Nova Scotia, Newfoundland and Labrador, Yukon, and Northwest Territories will permit payments of any amount, at any time for any purpose without clawbacks. Quebec, New Brunswick and Prince Edward Island are allowing some use of RDSP fund but with some restrictions (visit www.rdsp.com for details).