Tuesday 28 April 2015

Some Flaws With RDSPs

First, let me say that I think Registered Disability Savings Programs are a good idea.  We have one for Alex and it is a relief to me to know that we are saving for his future.  I think there are some common misperceptions about RDSPs.  This is not a fund to care for adult children throughout their lifetime, but rather a retirement fund for the child which parents are contributing to.

That said, since RDSPs are a relatively new program, there have been some oversights.  This is to be expected.  As something transfers from theory to practice, there are always some real world situations which were not anticipated.  I'm bringing up these oversights because, like all government programs, some lobbying will be required to make the necessary changes.

In talking with other parents, I've identified two areas where I think the plan needs some work.

1) The death of the parents.  No one likes to think about this but are the parents likely to still be around when the child hits 59, the minimum age for withdrawals from an RDSP account?  With most parents having their children between 25 and 35, that puts them at 84 to 94, which means most parents will not be alive to see the money come out of these accounts.

I understand wanting to keep this as "retirement" money, but what if a child is 55 when their parents pass?  He or she would have to wait another 4 to 5 years before accessing funds or else have the government claw back a substantial portion of their earnings (the grants and interest).  I believe there should be a provision to allow adult children or their guardian/representative to access the funds on the death of the primary contributor/caregiver.  RDSPs are supposed to take care of our children once we're gone.  This should be a legislative no-brainer.

2) Divorced and estranged families.  The current RDSP model assumes a cooperative and open communication type of family.  Only one RDSP can be opened per child and the person who opens it (or their legal representative) is the one who can dictate how the money comes out.  So what happens when a couple is divorced?  It becomes a race to see who can open one first and then that person holds all the cards while their partner is left with no options.

This flaw came to light when a friend of mine went to open an account for her child, only to discover her ex had opened one already.  One of the reasons they had split up was because of the ex's spendthrift attitude to money.  She is permitted to contribute to the account, but is worried about doing so because she doesn't want to give her ex leverage over their child.  Although the money must be spent by the child, she could easily see the father convincing him to pay for a vacation or a car or some other major purchase, draining the account and leaving her child with nothing when it comes to his long term needs.

I'm not entirely sure how to fix this one.  One could split the amount of total contributions and grant money between the two parents, but that could end up effectively halving the support of a child of divorce.  And single parent families are already notoriously on the short end of the stick when it comes to available money and resources.  It seems like a double penalty.  This one will probably take some professional consideration to make it fair and no one will end up satisfied.  But an all or nothing approach isn't acceptable either.

I'd love to hear from other parents who have spotted flaws in the system.  Any takers?

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