Earlier this month we broke from tradition for DailyHomeRenoTips.com and wrote about the new Registered Disability Savings Plan, or RDSP.
We continue with a follow-up brief article with a couple of points which were brought to our attention by Emad Rizk of BMO Investments.
First, because of the late ‘go live’ for this new and much, much needed program, contributions made in January and February of 2009 will only count as 2008 contributions. This is to give new plans time to make contributions for the 2008 plan year.
This is important because this program is calendar year based, meaning that contributions made from 01-JAN to 31-DEC in a calendar year will go towards the determination of Federal Government grants for the same calendar year. However, for only 2009, per Emad, plan accounts will only have contributions count towards 2009 Federal Government RDSP grants during the 10 month period from 01-MAR to 31-DEC.
If you have or are about to setup a monthly contribution (like we did with Emad) please understand that you need to make a decision. Is it OK with you that such monthly (or any) contributions made in January and February of 2009 will apply to 2008? If yes, then go ahead and setup your monthly contributions now.
However, in our case we already made the $1,500 contributions for the 2008 plan year in a lumb sum amount. Therefore, what we did was to not have any contributions in January or February of 2009 and instead make 10 monthly contributions in 2009 from March to December. We will make automated contributions of $150 so by December 2009 we will have contributed the minimum $1,500 needed for the maximum Federal RDSP grants into the account.
But, we are not done. Come January 2010 the RDSP plan goes back to the standard calendar year basis. This means if you are like us and setup an automatic monthly deposit, and want to contribute only the minimum amount (because that is all you can afford at the present time), then starting January 2010 you need to reduce the automatic monthly amount from $150 back to $125 per month ($125 X 12 months - $1,500). If you don’t, there are no penalties; it is just that you are contributing more than you need to in order to maximize the available government grants.
I know it’s confusing. It’s just more complex than it needs to be because of the incredibly short window of time that the Federal Government gave for 2008 contributions. I wonder if Mr. Harper was more worried about stopping parliament because his minority government would have been defeated by the other political parties rather than paying attention to actually governing the country. But, I digress.
The other aspect of the RDSP that one needs to pay attention to is that this is a very, very long term type of plan. As Emad explained it to me, there is basically a 10 cumulative year claw back aspect to the new RDSP plans. Basically, when you make a withdrawal from the RDSP, the trustee for the plan (currently only BMO Investments) is required to remove from the account any grants received in the past 10 years. Wow!
The intent is that since contributions to an RDSP can only be until the year in which the individual reaches 59 years of age, when they tune 69 years old there will be the ‘nest egg’ from which they can draw to provide for retirement money. We can debate the harshness and impracticality of this, including the assumption that special needs individuals will be as ‘able’ as the rest of society to be working until 69 years of age, however that is for another time.
You just need to be aware that this restriction exists in planning whether to and how much to contribute to an RDSP.
As always, your comments and any correcting information are welcome.
3 responses so far ↓
1 Shane // Jan 5, 2009 at 10:23 pm
A couple quick notes: First as regards the Harper comment, it is worth noting that the RDSP has been law for some time now and the government was able to process applications as of December 1st. It is the financial institutions which didn’t have the systems up until the 22nd so the blame does not rest squarely on the government.
Also, bonds and grants are payable into the RDSP until the age of 49, making the earliest age for non-penalized withdrawal the age of 60. It is also worth noting that this seemingly harsh consequence is somewhat lessened for those setting up an RDSP earlier on in life. A disabled child for example who sets up at birth will hit the $70,000 grant limit by the age of 20, CDSG payments would then stop and he would be able to begin unpenalized withdrawals at the age of 31. (not so bad)
2 D // Mar 1, 2009 at 3:41 pm
You guys missed another 4 important issues which are:
1) if the disabled individual is no longer disabled (due to death or medical curing) the RDSP must be dismantled. If grants were received, then the last 10 years of grants must be paid back and all income taxes on the remaining gains must be paid. If the individual died, then there are estate tax liabilities on the money as well. This creates a level of inflexibility in real life scenarios.
2) parents usually have only so much money to save for their child and themselves. If there is an emergency expense and money has to be withdrawn from the RDSP, then there are grant clawbacks and as far as I understand, there is no provision to allow you to re-contribute this money taken out and get back the grants lost.
3) not all of the provinces have declared in law that the RDSP will not be used in the asset test to exclude a disabled individual from social benefits like persons with disability benefits. The existence of an RDSP in provinces where it may be used as part of this test or if in the future the disabled person moves to a province where the RDSP is part of the asset test, could have undesired impacts to the person’s benefits.
4) the investment account the RDSP sits in, it it is market based and has deferred sales charges or similar withdrawal service charges can result in much less money than initially intended on early withdrawals. Worse case scenario, assume an account is down due to market losses, a withdrawal at that time would result in the grants being clawed back first, then the withdrawal penalty (often based on the total initial deposit including the grants and bonds) and whatever remains goes back to the family. Mathematically, this can increase the withdrawal penalty 2.33 times and if the market is down, it could leave the family with little to none of their original investment.
Remember, there is no free lunch in Canada when it comes to the government
3 Dan // Mar 1, 2009 at 4:01 pm
Hi ‘D’,
Some of your points were made in the earlier article or in the referenced articles therein.
However, your last point is not correct re ‘market based’ and ‘deferred sales charges or similar withdrawl charges’. It depends on the nature of the investments which are purchased with the contributed or the grant money.
If one simply acquires GIC’s (which is our plan) then the investments and the accounts are not ‘market based’ and there are no deferred sales charges as there are if one was to acquire a mutual fund.
With the substantial grants, there is simply no reason to rish IMO either the contributions or grants with stock based investments.
This is a very long term type of account and is not intended for the beneficiary to be sitting in some luxury resort in their 50+ years.
Dan
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