Blog » Compress the timelines in the design of the RDSP

Compress the timelines in the design of the RDSP

Currently, the RDSP has several milestones built into its design:

  • Beneficiaries, whether a holder or not, can request funds from their RDSP at age 27 (provided the federal government contributions are greater than private contributions)
  • Contributions can be made through December 31st of the beneficiary’s 59th year
  • Payments must begin at age 60
  • The holdback amount is calculated as the contributions made by the federal government in the previous ten years
  • Specified years are defined as a life expectancy of five years or less
  • Life expectancy is set at 83.

a) Holdback Amount

Without question the greatest deterrent for people choosing not to open an RDSP is the holdback amount, which consists of the government contributions made in the previous ten years.  The holdback amount must be returned to government when a withdrawal is made.  The holdback amount can be as much as $45,000 and after ten years has passed since the last government contribution, it equals $0.

For most people, the holdback amount translates into the mindset that a person cannot make a withdrawal from an RDSP for ten years after the last government contribution.  The argument that after seven or eight years that the holdback amount will be trivial compared to the size of the RDSP and therefore shouldn’t be a deterrent has had little impact on the way people think about the RDSP.  Ask 100 people when they can make a withdrawal from an RDSP and 95 will tell you that you must wait for ten years after the last government contribution.

The result of this mindset is that the RDSP translates into a 30 year plan.  That is, people think that the beneficiary will not benefit for 30 years after opening an RDSP.  This is a deterrent to many people with unpredictable futures or shortened life expectancies. It is also a deterrent to people who are concerned about qualifying for the disability amount, uninterrupted, for 30 years and for people whose financial situation is precarious and who might not want to make contributions which result in a loss of their ability to access their money for 30 years.

The obvious solution is to shorten the holdback amount.  The holdback amount has two stated purposes – to prevent tax slippage (using the same money to get the federal Canada Disability Savings Grant year after year) and to make sure it is a long term savings plan.

Five years has been proposed by many groups.  A five year holdback would be between $22,500 and $0 in value.  It would shorten the RDSP to a 25 year savings plan.  Five years would still be a significant deterrent to tax slippage and people would never have to wait more than five years to retrieve their money (or the federal government contributions).

Why not three years?  The spousal RRSP also has the tax slippage problem.  (i.e. I contribute to my unemployed wife’s RRSP and get a tax deduction.  She withdraws it, returns it to me and I contribute it again, once again getting a tax deduction.)  The federal government has remedied this problem with a two year waiting period: funds contributed to a spousal RRSP cannot be withdrawn for two years.  To maximize the Canada Disability Savings Grant with a three year holdback would take 60 years.  (i.e.  I contribute to my RDSP and get the federal government grant.  I wait three years and make a withdrawal without penalties.  I then re-contribute the money I withdrew to get the grant again.)  To get all of the Grant, I would need to do this twenty times, which would take a minimum of 60 years.  Since, the Grant can only be receive until age 49, it would be impossible to maximize it.  The maximum holdback amount would be $13,500.  The overall lifespan to get all of the Grant and wait until the holdback amount was $0 would be 23 years.

An alternative tack would be to permit the withdrawal of funds from the RDSP (a percentage or from private contributions) for emergencies and/or the purchase of a home.  If funds could be withdrawn from the RDSP for these purposes, the significance of the length of the holdback diminished (discussed later).

Recommendation:  Reduce the holdback amount to ten years and permit withdrawals for emergency purposes and/or to purchase a home.

b) Life Expectancy

Many people have also indicated that the plan is too extended for an average person with disabilities.  Using a life expectancy of 83 in the calculation of Lifetime Disability Assistance Payments (LDAPs) is unrealistic – the life expectancy of a person with (lifelong or adult onset) disabilities is well below 83.   Furthermore, the conditions leading to a person’s the disability (autism, learning disabilities, Down syndrome, FASD, diabetes, liver and heart disease, multiple sclerosis, ALS, cystic fibrosis) have widely varying impact on life expectancy.

Consequently, even if a person is able to begin to use their RDSP in their middle ages, if the federal government has contributed more than the sum of private contributions, the total amount of payments in a year is limited by the LDAP formula.  The earlier that a person begins to receive payments, the smaller the annual amount is because it is calculated to last until age 83.  For example, a person with an RDSP of $200,000 who wishes to start LDAP payments at 43, would be limited to approximately $5,000 per year (approximately $200,000 / (83 – 43)).

Under the current rules, it is likely that people will leave significant amounts in their RDSPs when they pass away.  The residue will pass to their heirs or next of kin, which is not the purpose of the Canada Disability Savings Program.

Designing a flexible plan to accommodate a wide range of life expectancies would be difficult.  A further complication would be accommodating life expectancies that might change significantly over time.

The most flexible plan would be created by removing all limitations on the amount that could be withdrawn, whether the federal government contributions exceed private contributions or not.

Alternatively, reducing the life expectancy used in LDAP calculations from 83 to 65 would increase the amount that people could receive per year under the LDAP formula, enable people to derive greater benefit from their RDSPs, and increase the probability that the federal government contributions will assist beneficiaries.  People who are concerned about living beyond 65 and not having funds available from their RDSP could purchase a life annuity when they want to begin to receive payments.

Recommendation:  Reduce the life expectancy used in LDAP calculations from 83 to 65.

c) Age at which payments must begin

Currently, payments may begin at any age but must begin in the beneficiary’s 60th year.  If the holdback amount were reduced to five years, it would be possible to extend the age until which people can receive the Grant and Bond to 55 years of age.  Many people would like this as we have heard numerous concerns about people over 50 not being able to access the Canada Disability Savings Program.

However, if the overall expected length of a plan were shortened to age 65, without changing the year in which payments begin the RDSP would become even more skewed towards saving and away from reaping the benefits of having an RDSP.

We think that it would more make sense to reduce the age at which payments are required to begin to age 55.

Recommendation: Reduce the age at which payments must begin to 55 years.

This would result in a plan with the following milestones:

  • Beneficiaries, whether a holder or not, can request funds from their RDSP at age 27 (provided the federal government contributions are greater than private contributions)
  • Contributions can be made through December 31st of the beneficiary’s 54th year
  • Payments must begin at age 55
  • The holdback amount is calculated as the contributions made by the federal government in the previous five years
  • Specified years are defined as a life expectancy of five years or less
  • Life expectancy is set at 65.

The one additional implication is that RRSP/RRIF rollovers would be permitted only to age 54.  This may not be realistic for many parents who will not pass away until their son or daughter is older than 54.  This problem, however, could be solved by making an exception to contribution rules for RRSP/RRIF rollovers.