Unless you opened up a Registered Disability Savings Plan (RDSP) in 2008 and maximized the matching contributions from the Government, you are likely entitled to retroactive contributions from the Government.
While any retroactivity for the Bond portion of the RDSP you may be eligible for is automatically provided by the Government, you will need to make additional contributions in order to secure any available RDSP Grant retroactivity.
There are two fundamental benefits to doing this. The first benefit is pretty straightforward: you increase the size of the account faster and the larger the account the more money you have to earn a rate of return.
The second benefit is that the funds in they RDSP will be accessible without penalty sooner. In order to maximize the Government contributions and withdraw funds from the RDSP without any penalty, you must wait 10 years after the last contribution from the Government is received. If you withdraw any money before that, the Government will revoke at least a portion of what they contributed. See Withdrawing Money From My RDSP – What Is This 10 Year Rule Anyway??? for more information on the 10 year rule. Normally, it will take a minimum of 20 years to maximize Government contributions, if you don’t take advantage of retroactive contributions. That means it would take a total of 30 years before you could access the funds without any penalty. If you are eligible for retroactive contributions going back five years, you can reduce that waiting period by 5 years. Instead of 30, you are down to 25 years.
But you have to be careful. Do not try to secure all the retroactivity in one year by making a large contribution to the RDSP account. Why? Because the Government will only provide a maximum of $10,500 in Grants in one year. If you are eligible for 4 years in retroactivity, equaling $14,000 in Grants, it will take two years to collect all the retroactivity.
Also, the formula to determine the amount you should deposit to secure the maximum amount of $10,500 in Grants in one year is not straightforward. There are two portions to the Grant. When annual net family income is $93,208* or less*, the first $500 portion contributed in a year earns $1,500 in Grants (three dollars for every one dollar contributed). The next $1,000 portion contributed, the Government provides $2,000 in Grant money (two dollars for every one dollar contributed). If you have not contributed for a number of years, the Government matches on the first $500 of every year you have missed, and only once the blocks of $500 for each missed year is done do they start matching on the $1,000 portion.
Confusing, I know. Talk to your bank or advisor who manages your account to help you with the calculation and ask them to explain it in detail. I suspect many bank employees and independent advisors are not aware of how the Grant retroactivity is calculated. If their calculation results in an expected matching grant that is greater than $10,500, they are not aware of the correct formula. If the calculation is not done correctly, you could easily find yourself contributing more than you need, thinking you will get a larger Grant in return than you will actually secure.
Regardless of how confusing the formula may be, taking advantage of any retroactive contribution room can accelerate the RDSP account, tremendously. The RDSP recipient should have more money in the account and be able to access it without penalty years earlier.
*All income thresholds are 2016 net income figures which are used to determine 2018 RDSP government contributions. Grant and Bond calculations for any given year, use net family income figures from the 2nd year previous to the year in question. To determine 2018 Grant and Bond amounts, net family income from 2016 is used. Income thresholds increase each year in accordance with inflation. Net income is found on line 236 of a tax return or notice of assessment.
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