Choosing to begin Lifetime Disability Assistance Payments (LDAP) from a Registered Disability Savings Plan (RDSP) isn’t always about clearing the 10 year Assistance Holdback Amount (AHA) period, it’s also about maximizing tax deferred compounding versus the opportunity cost of inflation. Those fortunate enough to have opened an RDSP earlier in life may have the choice to start LDAPs before the age of 60. Choosing the right time to begin LDAPs is a strategic balancing act, weighing health and lifestyle needs against tax efficiency and wealth preservation.
Start withdrawals early, after AHA but before 60 years of age
If the beneficiary is under the age of 60, and the 10 year holdback period has ended, they can start LDAPs without penalties. But why would they?
Tax consequences
Once the beneficiary reaches age 60, the government mandates LDAPs which are based on a specific formula:
LDAP = A / (B+3−C) + D
Where A is the fair market value of the plan, B is greater of 80 or beneficiary’s age at the start of the year, and C is the age of the beneficiary at the start of the year. D represents locked in annuity income, which is 0 for most people. As the beneficiary gets older, the denominator shrinks, forcing larger mandatory withdrawals from the account. And with the exception of the personal contribution portion of the account, payments from an RDSP are taxable income. If a beneficiary elects to start LDAPs in their 50s, they are spreading the tax liability over a longer period. Waiting until 60 could potentially move the beneficiary into a higher tax bracket.
Hard to spend money when dead
For a beneficiary with a degenerative health condition, waiting until age 60 may be sub optimal. Starting LDAPs early provides the beneficiary with supplemental income to improve their quality of life and well being while they can still appreciate the value of the money.
Waiting until age 60 and compounding interest
Every dollar left in the RDSP grows tax deferred. Because interest compounds on both the principal and previously earned gains, investment growth accelerates significantly as the account balance increases. Leaving funds inside the plan for as long as possible is an optimal strategy to maximizing value.
Optional Disability Assistance Payments (DAPs)
While LDAPs are recurring, beneficiaries can also opt for a Disability Assistance Payment (DAP), which is a lump sum withdrawal. If the plan has more private contributions than government grants and bonds, then the plan is classified as a Non-Primarily Government Assisted Plan (Non-PGAP), and larger amounts can be withdrawn from the account before LDAPs commence.
Check out the DAP calculator to see how much money can be withdrawn from an RDSP.