The Registered Disability Savings Plan (RDSP) is one of the most powerful wealth building tools available for Canadians with disabilities, offering up to $90,000 in lifetime federal grants and bonds. Those eligible will often open an account at the same financial institution they do their daily banking with without realizing there may be better options elsewhere. If an financial institution is falling short of expectations, an RDSP can be transferred to a different bank.
Because the RDSP is a registered account, there is a specific process that must be followed to avoid tax penalties or accidentally triggering the 10 year grant and bond proportional repayment rule. Here is an in depth breakdown of why account holders may opt to move an RDSP to a different bank, exactly how the transfer process works, and the common pitfalls to avoid along the way.
Moving away from mutual funds with high fees
Account holders typically open an RDSP at a traditional brick-and-mortar bank, where they may be advised by bank staff to invest their money in mutual funds. As they grow more knowledgeable and comfortable with investing, those same investors may choose to pivot into a self-directed account to eliminate high management fees and invest in low cost index funds or ETFs. The only two major banks that offer self directed RDSP accounts are TD Direct Investing (TDDI) and National Bank Direct Brokerage (NBDB).
Nonexistent customer support
The RDSP is a relatively new and unique financial product with complex rules. Unfortunately, employees at the bank are often poorly trained on the particulars of the plan. When account holders grow tired of dealing with customer service reps who do not understand how matching grants and bonds work, or the specifics of the AHA rule, they may choose to move to an institution that specializes in RDSPs.
How to initiate the transfer?
Transferring an RDSP account to a new bank or financial institution involves 3 steps:
Step 1 – Open an account at the new institution
The account holder or beneficiary opens an RDSP at the new bank or brokerage.
Step 2 – Authorize the transfer
While opening the new account, the account holder and/or beneficiary will authorize a transfer of funds which instructs the new financial institution to contact the old financial institution to request a direct transfer. The funds or investments within the RDSP must be “pulled” by the new bank from the old bank and not the other way around. The plan holder must sign consent Holder Consent Form EMP5612, which authorizes the banks to complete and execute the transfer form EMP5611.
The new bank will communicate with the old bank and request account information, a history of personal contributions, government grant and bond amounts, and any withdrawals on file. The banks will process the transfer and notify Employment and Social Development Canada (ESDC) electronically. Once the money has been transferred, the RDSP account at the old bank will automatically close. The entire process can take anywhere from a few weeks to several months.
Optional step – Reassess risk and select investments
Most financial institutions would recommend that new clients undergo a questionnaire that assesses risk tolerance to help determine an appropriate investment strategy. This step is particularly critical if the RDSP assets are transferred in cash as leaving a balance sitting in dollars earning little to no interest can be a common mistake especially among risk averse investors. Completing the assessment ensures that the money can be strategically invested into the market at a suitable risk level for the beneficiary.
Common pitfalls
Transferring an RDSP between banks can be problematic if customers are unaware of certain caveats:
Withdrawing funds directly from the old bank and depositing them into the new bank is not the same as making a transfer between banks
Attempting to move an RDSP from bank A to bank B in this manner can have undesirable financial consequences. A withdraw may trigger the Assistance Holdback Amount (AHA) rule, forcing the automatic clawback and repayment of all government grants and bonds received in the previous 10 years, regardless if the funds are immediately redeposited into an RDSP at another bank. It is imperative that account holders and/or beneficiaries not withdraw money directly and instead authorize the new bank to handle the transfer of funds.
Transferring an RDSP before matching government grants or bonds have settled into the old account
If money is deposited into an RDSP at bank A, and then a transfer is initiated to bank B before the federal government has deposited the matching grants or bonds, it can create an administrative nightmare. The relinquishing bank must freeze the account to prevent further transactions and instruct the Employment and Social Development Canada (ESDC) to deposit the grants and bonds into the new account at bank B. If the government is not notified in time, the pending grants/bonds may be sent to the old closed RDSP account at bank A. To ensure a seamless transition, it would be wise for account holders to wait for any pending federal grants and bonds to be settled into the account at the old bank before initiating a transfer.
Attempting to transfer proprietary investments such as mutual funds or segregated funds
When transferring investments between banks, account holders will have the option of transferring funds either “in kind”, which is keeping the existing investments exactly as they are, or “in cash”, which is selling the investments for cash before they are transferred. Note that mutual funds and segregated funds at most banks are proprietary (exclusive), and cannot be transferred to another financial institution. If the RDSP has investments in these products it is recommended the plan be transferred “in cash” to the new bank, otherwise the transfer may be rejected.
“In cash” transfers lose time in the market
When transferring assets from the RDSP in cash, the process can take months, resulting in the money sitting in dollars on the sidelines during transit. If the stock market goes up during that period, the investor will miss out on those gains entirely.
Capacity concerns of the beneficiary
As each financial institution will have their own procedures to determine contractual capacity, beneficiaries may have to reestablish they have capacity to enter into a legal contract before opening the RDSP at the new bank. This may be especially challenging if the beneficiary suffers from a cognitive disease that is expected to get worse over time.
Paperwork is slow and mistakes can be made
If the holder of the RDSP is a parent, legal guardian, or Qualifying Family Member (QFM), opening the new RDSP can require additional paperwork which can cause delays to approve supplementary documentation. Forms filled out incorrectly will also cause delays.
Joint holder disagreements
To initiate an RDSP transfer, all registered holders of the relinquishing account must sign the transfer consent forms, and the transfer will be blocked until there is unanimous consent. This can be challenging if the current holders are separated parents or Qualifying Family Members (QFMs) who have lost contact or are no longer on speaking terms.
Outbound transfer fees
Most financial institutions charge an administrative fee of $150 to process an outbound transfer and close an account. However, many banks receiving transfers do reimburse fees if the balance meets minimum thresholds. Once the transfer is completed, the account holder should download the final statement from the old bank showing the fee charge and submit a reimbursement request to the new bank.
National Bank will reimburse fees if the value of the transfer is $20,000 or more.
TD Direct Investing will reimburse fees up to $150 with a minimum transfer value of $25,000.