If you have been contributing to your RRSP and building up your retirement nest egg, good for you! You are on the right track. Avoid making an RRSP over-contribution to ensure you keep all your well-earned returns.
Each year you have earned income, you automatically earn RRSP contribution room, which is 18% of your prior year’s earned income up to a maximum amount per year. Contributing more than the stipulated amount may result in a 1% monthly tax.
Read on to learn about RRSP over contributions, excess contribution penalties, and how to rectify the issue.
- Over-contributing to your RRSP will result in a 1% monthly tax if the excess amount is over the $2,000 lifetime buffer.
- The maximum annual RRSP contribution limit in 2023 is 18% of your income in 2022, up to $30,780.
- You can rectify an over-contribution by withdrawing the excess amount and completing the necessary tax form if applicable.
Contributing excess funds to your RRSP than your contribution limit amount will result in excess contributions. Although most Canadians rarely put down their annual maximum RRSP limit, it is possible to have a situation where you over-contribute to your RRSP.
An over-contribution may occur because:
- You and your employer are contributing to a workplace retirement savings plan. For example, you may both be contributing to a registered pension plan, which counts toward total RRSP contributions. If you (an employee) also contribute to another RRSP outside work, you must be vigilant to ensure you do not over-contribute.
- You do not pay attention to the “RRSP Deduction Limit Statement” line on your Notice of Assessment, which shows your total contribution room.
- You forgot that you had contributed to a spousal RRSP, effectively decreasing your available contribution room.
RRSP Over-Contribution Penalty
You can over-contribute a lifetime total of $2,000 without incurring a penalty tax. A penalty of 1% per month is charged on excess contributions that exceed $2,000.
For example, say you over-contribute $10,000 to your RRSP; you will be charged 1% on $8,000 (i.e. $10,000 – $2,000) excess contributions.
$8,000 x 1% = $80
The tax will amount to $80 per month.
The government allows the $2,000 as a buffer against potential errors that result from a pension adjustment.
Related: TFSA vs. RRSP
What can you do if you over-contribute to your RRSP?
If you realize you have over-contributed more than $2,000 to your RRSP, contact your financial institution immediately for the next steps. You will generally want to withdraw the excess amount as soon as possible.
Any withdrawals would have to be included as income in your tax return in the year the withdrawal is made. You may have to complete Form T1-OVP, Individual Tax Return for RRSP Excess Contributions.
Your financial institution will normally withhold tax on the amount withdrawn. Ensure you pay any associated taxes within three months of the end of the taxation year you over-contributed to avoid paying additional penalties and interest.
You can also ask the Canada Revenue Agency for a waiver if you can show that your excess contributions are due to a reasonable error and you are taking steps to rectify the error. You must complete Form T3012A, Tax Deduction Waiver on the Refund of your Unused RRSP Contributions.
The process of rectifying an RRSP over-contribution can be tricky. If you feel confused or overwhelmed by the paperwork, you may want to seek the advice of your financial advisor or accountant.
If the excess contribution to your RRSP only exceeds your deduction limit by $2,000, there is no tax levied, and you do not need to do anything.
However, that excess of $2,000 is not tax-deductible in the current year but may be carried forward and deducted in a subsequent year when your deduction limit allows it.