Blog » Should the Holdback Amount deter you from opening an RDSP?

Should the Holdback Amount deter you from opening an RDSP?

I have spoken to people who seem willing to walk away from more than $40,000, even when no personal investment is necessary: this is the situation when one receives the Canada Disability Savings Bond only into an RDSP and earns an average of 5.5% investment income over 30 years.

This leaves me scratching my head.  I’d like to understand this choice better and I’d like to provide numbers (and pictures) so the decision is less an emotional decision and more a one based on facts.  I haven’t spoken to all of you, so if you have some thoughts that are not captured in this piece, please post your comments.

I know that few things cause such consternation as giving up something we consider to be ours; it’s human nature.  As a result the holdback amount acts as a powerful incentive to save and to resist making withdrawals.  In fact, the holdback amount is so powerful that it even causes people to resist the temptation of free money.  That is people decide NOT to use the RDSP in the event that they MIGHT have to give some money back to the federal government; money that they otherwise wouldn’t have received.

Granted, some people’s situations are more complicated.  Not wanting to tie up your very precious resources for a long time when you don’t know what the future will bring is a fair concern.  Not wanting to partake in something that probably will not benefit you, as might be the case with people who are medically fragile, is understandable.  For these reason, I have previously examined it as a policy issue and suggested some improvements: (Click here for the post on options for changing the “ten year rule”)

What is the holdback amount | ten year rule?

The holdback amount is the amount of Canada Disability Savings Grants or Bonds that an RDSP has received in the previous ten years.  If the RDSP has received the maximum annual amount of Grant and Bond in each of the previous 10 years it is $45,000.  If an RDSP has received no Grant or Bond in the previous 10 years it is $0.

When a withdrawal is made or when the RDSP is closed, the holdback amount is ALWAYS returned to the federal government, excepting for the new rules around specified years.

Your financial institution must track these government contributions and is responsible for returning the holdback amount to the federal government if necessary.

Myths about the holdback amount

I hear two common misconceptions about the holdback amount:

1. Once government money has stayed in the RDSP, I can take it out without returning it to the federal government, right?  WRONG!  It’s not a question of “first in, first out” or “an amount vesting after 10 years”.  The holdback amount is the holdback amount and must be repaid until it is equal to $0.

2.  I can’t take money out of my RDSP for ten years after the last government contribution, right?  WRONG!  You can take money out of your RDSP anytime but the holdback amount and the LDAP formula may apply.

How much is the holdback amount?

The holdback amount in your RDSP grows over time, levels off, and then begins to shrink until it is $0 ten years after the last government contribution.  Over time it shrinks relative to the total amount in the RDSP.

RDSP that receives the Bond only for 20 years

RDSP that receives maximum Bond and Grant for 20 years

In both situations you’ll notice that after 10 years passes, the lines diverge rapidly; the holdback amount, relative to the total is decreasing rapidly.  This happens for two reasons.  First, the government amounts that have been in the RDSP for longer than 10 years are no longer in the holdback amount.  Second, the amount of cumulative earned income is growing ever faster.

Holdback versus non holdback amounts

What is important, however, is how much is the holdback compared to the non holdback amount.  This is important because, if a withdrawal were made, you’d have to give the holdback amount back to the federal government and you’d keep the non holdback amount.

Here’s how the holdback and non holdback amounts compare at 10, 20, 25 and 30 years in an RDSP receiving the maximum grant and bond each year (and earning investment income at an average 5.5% per year).

What is really interesting in this situation is that at 20 years, if you were to make a withdrawal $45,000 would return to the government and you would be left with $175,716.  Most people focus on the loss of $45,000 but if you look at having $175,716 after 20 years from a $30,000 investment, that’s an average annual return of 9.2% compounded annually.  Most people would consider that a pretty good return on investment.  For example, a $30,000 investment with 5.5% returns compounded annually would only produce only $87,000 over 20 years.

At 25 years, if you made a withdrawal, $22,500 would return to the government and you would be left with $265,968.  To generate that amount from $30,000 your investments would need to generate 11.5% compounded annually.

In the situation of receiving the Bond only the holdback versus non holdback amounts for 20 and 25 years look like the following:


A withdrawal made at 20 years would result in $10,000 returning to government.  But you would be left with $26,786. At 25 years, $5,000 would return to the government but you would have $43,078 left.  Both of these situations are great, considering you wouldn’t have made any initial investments.


We tend to focus on what we are losing with the holdback amount but if we switch it around and focus on what we gain, the holdback amount need not be such a deterrent to people looking for a great way to save for the future.