Withdrawing from a RDSP must begin before the end of the year the beneficiary turns 60 years old. However, withdrawals can happen at any age but there may be penalties. There are two types of withdrawals:
- Lifetime Disability Assistance Payments (LDAP)
- Disability Assistance Payments (DAP)
When withdrawing from a RDSP, plan holders and beneficiaries should be aware of the holdback period which is discussed below.
Lifetime Disability Assistance Payments
LDAPs are lifetime payments that must start by the end of the year the beneficiary turns 60. Payments may earlier with if the RDSP is a Specified Disability Savings Plan (SDSP). An SDSP is a variation of the RDSP and relates to when the beneficiary has a shortened life expectancy of 5 years or less. SDSP beneficiaries are allowed to withdraw up to $10,000 annually without a penalty.
The amount withdrawn from the RDSP as LDAPs is limited by a formula. If the federal government contributed more to your RDSP than you did, then the amount you can withdraw is limited. The formula does not apply if the beneficiary has a shortened life expectancy.
A/(B + 3 – C) + D
A = the Fair Market Value of the RDSP on January 1st, other than the value of locked-in annuities held in the plan.
B = the greater of 80 and the age of the beneficiary at January 1st
C = the actual age of the beneficiary at January 1st
D = the total value of all periodic payments reeived by the RDSP in that year, under a locked-in annuity
Speak to your plan provider to determine how much you’re entitled to and how to proceed withdrawing from a RDSP.
Disability Assistance Payments
Disability Assistance Payments are payments made to a beneficiary from the RDSP that may consist of contributions, grant, bond and income earned in the account. These payments could be requested at any time. However, keep in mind that any DAP withdrawals are subject to holdback in where you’ll return any government grants within the last 10 years.
Assistance Holdback Amount
If you proceed to withdraw from the RDSP, be aware of the “holdback period” of 10 years. The holdback period refers to any grants or bonds that the government has contributed into the RDSP in the last 10 years. Any withdrawals made from the RDSP will attract the holdback and grants/bonds will be returned.
The repayment rule is that for each $1 withdrawn, only $3 of grants or bonds paid into the plan in the last 10 years need to be repaid.
If 10 years have passed and no grants have been deposited by the government, withdrawals can happen without repaying any funds.
Withdrawing from a RDSP: Tax Implications
When withdrawing from a RDSP, it’s important to be aware of the break down of the plan. Every dollar withdrawn from an RDSP is broken down to three categories:
- Private contributions
- Government contributions
- Income/Growth
Private contributions in the RDSP can be withdrawn tax free but grants and bonds are included in your income. In addition, any growth in grants and bonds is included as income. RDSPs and RESPs are great investment vehicles to fund future education.
