The Registered Disability Savings Plan (RDSP) is well known for its strict 10 year repayment rule. For every $1 withdrawn from the account, $3 of government grants and bonds must be returned to the government, which is a costly penalty that discourages early withdrawals. But what happens if the beneficiary faces a terminal illness and needs that money now? For that case, the RDSP can become an SDSP if the beneficiary is eligible.
What is a specified disability savings plan (SDSP)?
If a medical expert verifies that a beneficiary’s life expectancy is five years or less, the account holder can elect to convert the RDSP into a Specified Disability Savings Plan (SDSP). This designation allows for annual withdrawals of up to $10,000 in taxable money, or the amount of the Lifetime Disability Assistance Payment (LDAP) formula, whichever is greater. Most importantly, these payments do not trigger the 3-for-1 government repayment rule, ensuring that the beneficiary can access their savings when they need it the most.
Can personal contributions be made to the SDSP? What about government grants and bonds? What about rollovers from a deceased parent or grandparents RRSP/RRIF?
If the plan has been elected into a SDSP, no further personal contributions, or government grants/bonds can be deposited into the account. However, rollovers from a deceased parent or grandparents RRSP/RRIF can still be rolled into the account, and lifetime contribution limit of $200,000 still applies.
What if the beneficiary doesn’t die within five years?
If the beneficiary doesn’t die within 5 years, the plan continues to be an SDSP indefinitely. The SDSP account status will continue until the beneficiary dies or the account holder reverses the designation of the plan back into an RDSP.
What if the plan is a PGAP?
An RDSP becomes a Primarily Government Assisted Plan (PGAP) when the total grants and bonds from the government are higher than private contributions deposited into the account. Basically, if the government has contributed more than the beneficiary (or their families) over the lifetime of the RDSP, then the plan is denoted as a PGAP. When the RDSP is a PGAP, the total amount that can be withdrawn annually is the greater between 10% of the total value of the account or the amount calculated by the Lifetime Disability Assistance Payment (LDAP) formula.
What about a non-PGAP account?
In a non-PGAP account, personal contributions (along with any rollovers) are greater than the total amount of grants and bonds the government has deposited. In this scenario, there is no maximum annual withdrawal limit and the account holder can request a Disability Assistance Payment (DAP) for any amount and at any time.
Note – If total annual withdrawals remain at or below SDSP maximums, the account is exempt from the 3-for-1 repayment rule. However, once withdrawal exceeds these maximums, the claw back rule is triggered, and the account will be required to pay back $3 of government grants for every $1 withdrawn.
Note 2 – The status of a plan (PGAP vs. non-PGAP) is determined on January 1st of each year based on the data from the previous year end. So a plan could not change from PGAP to non-PGAP (or vice versa) until the beginning of the following year.
Check out the SDSP calculator to see how much can be accessed from the RDSP account