If you have been contributing to your RRSP and building up your retirement nest egg, good for you! You are on the right track. To ensure that you keep all your well-earned returns, avoid making an RRSP over-contribution.
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.
For 2020, the maximum RRSP contribution limit was $27,230, and for the 2021 tax year, it is $27,830.
Contributing more funds to your RRSP than your contribution limit allows results in excess contributions. Although the majority of 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 towards total RRSP contributions. If you (employee) also contributes to another RRSP outside work, you need to 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 are allowed to 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 such as may result from a pension adjustment.
Related: TFSA vs. RRSP
What can you do if you over-contribute?
If you realize that you have over-contributed more than $2,000 to your RRSP, contact your financial institution immediately for the next steps. In general, you will 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Your financial institution will normally withhold tax on the amount withdrawn.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 3 months of the end of the taxation year in which you over-contributed to avoid having to pay additional penalties and interest.
You can also ask 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.
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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.