How do you get your money out?
When you take money out of your RDSP, you can use it for anything that you want. But…there are a couple of very important things you need to remember, including the “10 Year Rule”!
- If you receive a federal government grant or bond, there is a “holdback period” of 10 years from the year of the last federal contribution. The proportional repayment rule means that for each $1 withdrawn from an RDSP, you will lose $3 of any grants or bonds paid into the plan in the previous 10 years as they will need to be repaid to the government.
For those who opened an RDSP 10+ years ago:
- Since ten years have passed, grants and bonds deposited in RDSPs 11 or more years ago have become vested. In other words, the funds belong to the RDSP beneficiarie. The requirement to repay grants and bonds no longer applies to funds deposited in that year. However, the repayment requirement continues to apply to grants and bonds deposited within the last 10 years. So the withdrawal of any funds from an RDSP will trigger the repayment requirement. For example, if a $1,000 bond was paid into an RDSP each year for the last 12 years, the withdrawal of a $1,000 bond paid 11 years ago will trigger the repayment of $3,000 worth of bonds from the last 10 years.
- If the federal government contributed more to your RDSP than you (and your family and friends) did, then you can withdraw a limited amount in one year. This is either the money in your RDSP divided by the number of years before you turn 83, or 10% of the amount in the plan per year.
- You must begin to receive money from your RDSP starting at the age of 60. However, you can take one-off payments or start regular payments at any age. These withdrawals are dependent on the rules of the financial institution that you have your RDSP with.
Jeff opens an RDSP in 2011 and contributes $1,500 to his plan annually, being eligible for the maximum grant ($3,500) for each year. In 2016, the assistance holdback amount for his plan equals $21,000.
In 2016, he withdraws $600 from his RDSP. Under the proportional repayment rule, $1,800 of the assistance holdback amount will be repaid (approximately 9% of the repayment required under the former 10-year repayment rule). The $1,800 repayment will come from the grants paid into his RDSP in 2011 and the plan’s assistance holdback amount will be reduced to $19,200.
When your money is in an RDSP, you do not pay tax on it. When you begin to take money out of your RDSP, you must pay tax on part of it. Your personal contributions are considered after-tax dollars, and so you will not be taxed on them a second time. The grants, bonds, investment income, and proceeds from a rolled over amount will be taxed. When a withdrawal is made, the financial institution will complete a tax calculation and send the tax directly to the federal government. Then, when you file your taxes at the end of the year, you might get some of that money back.
Shortened Life Expectancy
When a medical doctor certifies in writing that the beneficiary has a life expectancy of five years or less, the beneficiary is considered to have a shortened life expectancy for RDSP purposes. After this designation is made, the RDSP becomes an SDSP, or a Specified Disability Savings Plan. This means that withdrawals will not trigger repayment of government contributions. When an RDSP becomes an SDSP, no further contributions are allowed, and any unused grant or bond entitlements will not be saved up for the years where the SDSP designation is in place. An SDSP is not affected by the beneficiary living past the five years and will remain an SDSP until the designation is removed. A plan holder can reverse an SDSP election at any time by providing written notice to the financial institution, and the financial institution must then contact Employment and Social Development Canada to update them and reinstate grant and bond options.
Following a designation as an SDSP, annual withdrawals of up to $10,000, in taxable plan savings, as well as a prorated portion of non-taxable amounts of plan contributions, can be paid without delay to the beneficiary, without requiring the repayment of the Assistance Holdback Amount (AHA) to the government. The AHA is the amount of Canada Disability Savings Grants (grant) and Canada Disability Savings Bonds (bond) paid into the plan in the preceding 10 years. In the case of an SDSP, the AHA is considered to be “nil”.
For an accurate calculation of the minimum and maximum withdrawals allowed from an SDSP, we recommend contacting your financial institution or Employment and Social Development Canada.
Every RDSP can have up to $200,000 in personal contributions, $70,000 in grants, $20,000 in bonds, and any amount of interest growth within the account. Once a deposit is made into an RDSP account, either personal or government, this reduces the total amount that can be deposited in the future. When a withdrawal from an RDSP is made, the contribution limits for your RDSP do not reset.
- You deposit $100,000 into an RDSP through personal contributions. You decide that you would like to withdraw $50,000. Even though your RDSP now has only $50,000 of personal contributions, you will still only be able to deposit another $100,000. This is because you have already used up half of that contribution room.
- You receive $10,000 in grants and $5,000 in bonds. You make an early withdrawal within 10 years of receiving those government funds of $5,000, causing a repayment of the full grant and bond amount. You are now only able to receive $60,000 in grants and $15,000 in bonds in the future.
Before you begin withdrawing from your RDSP, we strongly recommend consulting your financial advisor for more information about when and how to withdraw from your RDSP. You can also call our Helpline at 1-844-311-7526 or email us at firstname.lastname@example.org to find out more about this.