Blog » What if I need money from my RDSP?

What if I need money from my RDSP?

The single most often asked question about the RDSP is, “What if I need money from my RDSP before ten years after the last federal government contribution?”

This question is reflective of two issues.

1. A Design Flaw

The first is what I think is a design flaw in the RDSP; the fact that the holdback amount means that beneficiary’s must wait for ten years after the last federal government LoL contribution (Canada Disability Savings Grant OR Bond) OR repay the holdback amount.

Remember that the holdback amount is the amount that the federal government has contributed to an RDSP in the previous 10 years.  In other words, if an accnount holder maximizes government contributions and gets $3,500 per year in Grant and $1,000 per year in Bond for a total of $4,500 per year. After 10 years, the holdback amount is $45,000 and at the end of 20 years of contributions, the holdback amount is $45,000.  The holdback amount then begins to decrease each year after the year after government contributions are finished.  Two years later, the league of legends holdback amount is $45,000 minus $4,500 = $40,500.  The next year it is $40,500 minus $4,500 = $36,000 and so on.

Even though towards the end of the 10 year period the holdback amount will probably be small relative to the size of the RDSP, human nature is such that people don’t want to give even a bit of “their money” back to federal government.  I tend to  be part of that human nature group, although I always like to crunch numbers before making a decision.  It satisfies the logical part of my brain.

The design flaw, in my humble opinion, is the fact that this means the RDSP has a lifespan of 30 years before making (unpenalized) withdrawals.  That’s a long time to wait for gamer people who are living close to the edge financially (e.i. on $1,000 per month or less).  Furthermore, while the average life expectancy of Canadians is 80 years plus, it is significantly less for people with disabilities.  From all of the feedback I have received the single greatest complaint is the duration of the plan from start to finish.

2. Lack of awareness of the options (financial literacy)

Granted many people with disabilities and families have lower incomes and few assets.  But many people do have assets and if you do, then you have options beyond just making a withdrawal from an RDSP and paying the penalty.  A few assets that you might be able to get cash from or that you might be able to borrow against more effectively than withdrawing from an RDSP and paying the penalty include:

– your home (principal residence)

– a trust

– a life insurance policy

– a tax free savings account

– an RRSP.

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The following article from the blog, Boomer and Echo, provides more details about these options.

http://www.boomerandecho.com/when-you-need-cash-from-your-investments/

Remember, these are financial decisions and you should speak with a financial planner about your options.