RDSP–What was the catch?

Years ago, when the RDSP first came out I was skeptical.  Free money even from the government sounded too good to be true.  Friends encouraged me to open an account for my son. They emphasized, “the government is going to give YOU money for just putting in a few dollars!”   I still continued to wonder “What was the catch?”

For those who don’t know, an RDSP or  Registered Disability Savings Plan is long term savings plan created by the Canadian government. There can only be  one plan per person.  That person must have an approved Disability Tax Credit application on file with the Canadian Revenue Agency .  Unlike an RRSP, with the RDSP  the government will provide grant money to the investor that can then be invested and earn its own income.

When I first opened the plan for my son, my understanding was that the government portion (the grant money) had to stay in the account for a period of 10 years before it could be withdrawn.  In my mind, this meant that the money that I put in when he was 15 coupled with the grant money would cover a new insulin pump for my son when he turned 25.  I was wrong.

An RDSP is meant for long term savings for an individual who has serious health issues.  You can take the money that you put in out at any point.  When you make that withdrawal however, the government portion must also be returned.

In my case, I didn’t want to take the money out right away, I wanted to leave it for 10 years.  There is however another catch.  According to rdsp.com, “Disability Assistance Payments (DAP) can be made from an RDSP at any time, but grants and bonds may need to be repaid if they have not been in the plan for at least 10 years.” This meant that no one could contribute to my son’s RDSP for a period of 10 years prior to taking any funds out if we did not want to be penalized.  There could be no grant money for that 10 year period or the amount that I contributed had to be more than the government’s grant portion. That was not what I had been aiming for.

“Payments in the early years of a plan are limited by the assistance holdback rule. Since all grants and bonds received in the previous 10 years must be repaid once a disability assistance payment is received, the plan must hold back an amount equal to that amount in case a benefit repayment must be made. In some cases, that can prevent any disability payment at all.” states RDSP.com

What does this mean? 

RDSP are not the short term savings vehicle that some of us had hoped for.  They are a long term savings for those who cannot afford to save for their own long term medical expenses.

They still offer “free” money unlike any other plan but like other retirement plans, require the owner to be in his/her senior years before needing the funds.

It has been suggested that for parents contributing for their children, they should look at it as a safety net in case something happens to the parent.  If parents were to pass early, it would give the child a bit of extra help in their care.

For me, it is an individual choice that should be made with the help of both your accountant and financial advisor. I think that you have to have a clear idea of when and how the funds are to be used.  At that point, you can better decide which of the current savings options are best for your family and your situation.

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