It’s a question that arises when asking about withdrawals from an Registered Disability Savings Plan (RDSP), “What if someone withdrawals just the interest gained on investments inside the RDSP? Or what if they only withdrawal the personal contributions leaving government grants and bonds intact inside the account, will they still have to pay the 3 for 1 penalty?”
The short answer is yes. It is a logical assumption that if an account holder withdraws just the money either deposited via personal contributions or made via interest from said personal contributions, they shouldn’t have to pay the government anything back. Unfortunately, the RDSP does not allow one to choose which bucket of money to withdraw from, nor can an account holder instruct the bank which bucket of money to withdraw first.
Proportional Repayment Rule
When withdrawing money from an RDSP, the government views all withdrawals coming from the entire pool of assets. The rules state that for every $1 withdrawn the account must pay back $3 of grants or bonds from the previous 10 years. This rule exists because the RDSP is intended as a long-term savings vehicle and to discourage early withdrawals.
Order of repayment
The repayment process follows a First In First Out (FIFO) method, meaning the oldest grants and bonds are paid back first.
Example – Lets say the RDSP account received grants of $3,500 in 2023, $3,500 in 2024 and $3,500 in 2025. The total Assistance Holdback Amount (AHA) is $10,500. A withdrawal of $2,000 in 2026 would require a repayment amount of $6,000 ($3 repayment for every $1 withdrawn). The breakdown is as follows:
- First, $3,500 is repaid to the government to completely pay off the 2023 grant.
- Second, the remaining $2,500 is repaid from the 2024 grant.
- The 2025 grant remains untouched.
Even though the account holder might want to pay off the smallest or newest debt first, the government automatically settles the oldest obligation first before moving to the next one. The updated AHA after the withdrawal is $4,500.
What if the RDSPs Fair Market Value (FMV) is less than or equal to the AHA?
If the FMV of the RDSP is less than or equal to the AHA, then withdrawals are strictly prohibited and should be rejected at the bank.
According to the Canada Disability Savings Regulations Section 5.3 (1), when a withdrawal is made the issuer must repay to the Minister the least of the following:
- $3 for every $1 withdrawn,
- The Fair Market Value (FMV) of the account property immediately before the withdrawal,
- The Assistance Holdback Amount (AHA) immediately before the withdrawal.
Example – Lets say the newly opened RDSP has received a $1,000 bond from the government. As no personal contributions have been made, the balance of the account is exactly $1,000. The account holder would like to withdrawal $1. Because a withdrawal would result in the Fair Market Value of the account falling below the remaining Assistance Holdback Amount, the transaction should be denied by the bank. Lets look into the math and uncover why.
- Withdrawal amount – $1.
- Proportional Repayment calculation – According to the formula, the least of ($3 per $1 = $3) or (FMV = $1,000) or (AHA = $1,000) is $3.
- To process a $1 withdrawal, a total of $4 must be withdrawn the account ($1 for the actual withdrawal and $3 paid back to the government).
- Account balance after withdrawal – $1,000 – $4 = $996
- AHA after withdrawal – $1,000 – $3 = $997
Because the balance ($996) after the withdrawal is lower than the new assisted holdback amount ($997), the bank is legally required to reject the transaction.