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Payments from RDSPs

Most people don’t have to worry about withdrawals or payments from Registered Disability Savings Plans right away because they will use the RDSP to build wealth for “future” financial security.  But if you want to know how well the plan will work for you or your loved one, you need to understand any limitations on withdrawing money from your RDSP.

When thinking about payments, you need to consider the federal rules governing payments from RDSPs as well as local provincial rules that might affect a beneficiary’s provincial disability benefits. 

RDSP Payment Rules

There are two types of payments that can be made from RDSPs:

1.  Disability Assistance Payments – any payment made from the RDSP to the beneficiary.

2.  Lifetime Disability Assistance Payments – a special type of payment that must continue at least once a year after they begin. These payments can begin at any age but they must begin when the beneficiary turns 60 years.

Lifetime Disability Assitance Payments are limited to an annual maximum amount based on the beneficiary’s life expectancy and the value of the plan. This amount is determined by the following formula:

Total value of RDSP/(Life Expectancy + 3 – Beneficiary’s Age) + Annuity Payments

Unless a doctor has said in writing that a beneficiary is not likely to live more than five years, life expectancy is set at 80 years.  This means that in most cases the formula will be:

Total value of RDSP/(83 – Beneficiary’s Age) + Annuity Payments

You’ll notice that as the beneficiary gets older, the size of the payments grow.  You can, however, use annuities so that the payments are the same from year to year. 

For example, let’s assume Stephen has $100,000 in his RDSP at the age of 60.

Option 1: Lifetime Disability Assistance Payments Calculated by the formula

Stephen’s payment would be calculated as follows:

Year 1              $100,000 / (83 – 60) = $4,347

Year 2              $100, 913 (assuming income at 5.5%) /(83-61) = $4,587

Until age 82 where a final amount of more than $15,000 would be paid out.

Option 2: Purchase of a Life Annuity

If Stephen purchased a life annuity with the $100,000 in his plan, then he could receive payments of approximately $7,000/year (assuming income rate of 5.5%) from his RDSP for the rest of his life.

Holdback Amount

RDSPs must ALWAYS keep enough money in the plan to cover the government “holdback amount”.  The holdback amount is the total amount of Grants and Bonds received in the last ten years.

What if  you don’t apply for the federal Grant and Bond?

If you waive the federal Grant and Bond, the RDSP permits completely flexible withdrawals.  There is no holdback period or amount, you can withdraw as much or as little as you want, except that once the Beneficiary turns 60, Lifetime Disability Assistance Payments must begin.

What if the Family & Individual Contribution exceeds those of Government?

If family contributions exceed government contributions (Grant and Bond), withdrawals of any amount can be made at anytime, except:

         They can not be greater than the holdback amount

         Any Grant or Bond received within ten years must be repaid

         Lifetime Disability Assistance Payments must begin at age 60 years

If family contributions exceed government contributions (Grant and Bond) and ten years has passed since the last government contribution, payments of any amount can be withdrawn for any purpose without penalty.

What if the Government Contributions exceed those of the Family & Individual?

If government contributions (Grant and Bond) are greater than those of the family and individual, then:

         Disability Assistance Payments can be made before the beneficiary is 60 years of age, but maximum annual withdrawals will be limited to the Lifetime Disability Assistance Payment formula.

         Once the beneficiary is 60 years of age, the total amount of Disability Assistance Payments must be equal to the Lifetime Disability Assistance Payment formula.

         If the beneficiary is between 26 and 59 years, he or she has the right to request Disability Assistance Payments from the RDSP.  These payments must not exceed the Lifetime Disability Assistance Payment formula.

What if your relative has a shortened life expectancy?

If your relative’s doctor certifies in writing that the beneficiary’s health is such that the beneficiary is not likely to live more than five years, then there will then be no maximum limits on the amount of disability assistance payments that can be made to the beneficiary in a specified year (except the holdback amount). 

These five years are referred to as specified years.

Provincial Implications

Disability income assistance programs in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Nova Scotia, Newfoundland and Labrador, Yukon, and Northwest Territories will permit payments of any amount, at any time for any purpose without clawbacks.  Quebec, New Brunswick and Prince Edward Island are allowing some use of RDSP fund but with some restrictions (visit www.rdsp.com for details).

 

For those of you wanting some help filing your 2008 tax return, we have developed a 16 page Tax Bulletin designed to make it easier for you to access all the money you are eligible for and take some stress out of filing.  Available for free from www.rdsp.com, the tax bulletin is a combination of  expert, professional, and lay advice to help individuals and families navigate the complexities of their tax return.

In the Tax Bulletin you will find articles on:  the Disability Tax Credit,  the Medical Expenses Credit, the Tax Free Savings Account, the Registered Disability Savings Plan, Top Ten Tax Tips from Tax Expert Jamie Golombek, the Canada Child Tax Benefit, Taxation of Trusts, the Caregiver Credit, Estate Tax , the Working Income Tax Benefit, and much more.

If you would like to receive an electronic version of PLAN’s 2009 Tax Bulletin Navigating Your 2008 Tax Return for FREE, you can follow this link to RDSP.com and Join PLAN for free.  Once you put in your information you will be sent a follow-up e-mail with the Tax Bulletin attached.

If you would like a hard-copy you can contact PLAN at 604-439-9566 or http://www.plan.ca and have it sent to you for a small cost.

For those of you wanting to capitalize on the 2008 Federal contributions into a Registered Disability Savings Plan, today is the last day to get your plan set up and contribute for the 2008 year, leveraging up to $4,500 into your plan.

As most of you will know, the Federal Government extended the deadline (originally December 31st, 2008) until March 2, 2009 (today) for people to set up an RDSP and contribute, and receive the 2008 federal government contribution.  The federal government contribution is available through two mechanisms; the Canada Disability Savings Grant (CDSG), and the Canada Disability Savings Bond (CDSB).

The Canada Disability Savings Bond was created to encourage people to set up a plan, and does not require any contributions in order to receive the money into your plan.  As long as your income is below $21,287, and you have set up an RDSP, you will receive $1,000 into your plan every year, for up to $20,000.  If you have an income between $21,287 and $37,885, you can still receive a portion of the bond.

Again, no contributions necessary to receive the Bond.

The other way to receive more federal money into your plan is to have personal contributions from yourself, family or friends put into the plan.  By contributing money into your plan, you will also be eligible for the Canada Disability Savings Grant for up to $3,500 a year ($70,000 lifetime maximum).  Remember, you can receive both the Grant and Bond.

The amount of Grant you receive is, like the Bond, based on your income.  If you have an income equal to or below $75,769, you can receive $3 for every$1 you put into the plan for the first $500.  For the next $1000 you put into the plan, you will receive $2 for every $1.  This means that if you contribute at least $1,500 into your plan, you can receive up to $3,500 in Grant.

For those who have an income above $75,769, you can still receive $1 for every $1 you put in (for up to $1,000 annually).

If you want to capitalize on these 2008 government contributions (up to $4,500 for only $1,500 of your personal contributions), you will need to open up your RDSP today and, if you are planning to get the Grant for 2008, contribute whatever you can into your plan.  By putting in at least $1,500, you will maximize the amount you can receive from the federal government.

For people who are eligible for the full Grant and Bond, $1,500 of your money =$6,000 into the plan.

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