The Registered Disability Savings Plan (RDSP) is a valuable financial tool, but it is still not well known. Among the families I work with, many hesitate to make withdrawals for fear of losing grants or jeopardizing social benefits. Here are five misconceptions I want to debunk to help you use the RDSP with confidence.
Myth 1 – All Withdrawals Result in a Loss of Grants
False. There are two types of withdrawals from an RDSP: Disability Assistance Payments (DAPs) and Lifetime Disability Assistance Payments (LDAPs). As long as you follow certain rules, grants will not be entirely lost. Only the amounts received in the 10 years preceding a withdrawal are partially recoverable by the government, at a rate of $3 for every $1 withdrawn.
Myth 2 – You Must Wait Until Age 60 to Withdraw
No. You can withdraw money from an RDSP before age 60, even though it is not automatic. The plan holder can request a withdrawal at any time, but if there have been grants within the last 10 years, the famous “10-year rule” applies. However, in many cases, if the person is in a highly vulnerable situation, has a significantly reduced and predictable life expectancy, or if the account contains few recent grants, it may be relevant to make withdrawals earlier.
Myth 3 – Withdrawals Are Taxed as Income
Not entirely. Only the portion coming from grants, bonds, and investment income is taxable. The amount you contributed yourself to the RDSP is returned tax-free. Moreover, for many people with disabilities whose income is low, the tax to be paid is often zero or very low.
Myth 4 – Withdrawing from the RDSP Cuts Off Social Benefits
Amounts withdrawn from an RDSP are considered income for programs such as basic income and come with an exemption. This means that the person can use these funds, up to this exemption, to improve their quality of life (transportation, housing, leisure, etc.) without fear of losing their eligibility. In addition, starting at age 65, these programs are replaced by the Guaranteed Income Supplement, which is not reduced based on RDSP withdrawals.
Myth 5 – You Must Empty the RDSP Once Withdrawals Begin
False. The RDSP does not have a deadline for being depleted. Once withdrawals begin, it is possible to continue investing, receiving investment income, and making withdrawals as needed. However, the law imposes an annual limit on LDAP withdrawals: they cannot exceed 10% of the total value of the RDSP at the end of the previous year. The pace and strategy of withdrawals should therefore be planned with this rule in mind, while adapting to the situation of the person concerned.
The RDSP is a complex but powerful tool. Understanding withdrawal rules allows for more informed choices and provides greater financial security for your loved one. At Finandicap, we can help you plan withdrawals so they maximize benefits while respecting the real needs of the person.