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A Registered Retirement Savings Plan (RRSP) is a wonderful tool to help you save more money for retirement. However, there are some rules when it comes to contributing to an RRSP that if not followed, you can find yourself in some trouble. But, before you go into panic mode, there are some things you can do to fix or minimize your mistake. This article will go into detail about what you should do if you over-contribute to your RRSP.

What’s Considered A RRSP Over-Contribution? 

An RRSP over-contribution occurs when you deposit more into your RRSP than what your deduction limit allows. Contributions include direct contributions to your RRSP plan, pension plan, or pooled registered pension plans.

For example, if your RRSP limit for a particular taxation year is $14,000, and you contributed $21,000, you would have over-contributed by $7,000. Over-contributions are subject to taxation.

How Much Can You Contribute To Your RRSP In 2024?

RRSP Contribution Limit$31,560 or 18% of your earned income from the previous year (whichever amount is lower)

What Happens If You Over-Contribute To Your RRSP?

The penalty for over-contributing is a 1% tax on your excess contributions per month. This is only applicable to the excess contribution that exceeds your RRSP deduction limit by more than $2,000.

Also keep in mind that if you file your taxes late, you’ll be subject to more penalties, so be sure to be diligent and get your taxes in on time.

Will I Be Penalized If I Over-Contribute To My RRSP By $1? 

No, you won’t be penalized if you over-contribute by $1. You won’t be penalized unless your over-contribution exceeds the RRSP deduction limit by more than $2,000. 

However, keep in mind that the extra $2,000 you can deposit into your RRSP without penalty cannot be used to deduct your taxable income. 

How Do You Calculate Your Penalty Tax? 

There is a $2,000 over-contribution buffer, which means you will avoid penalty fees if your excess contribution is within this limit. But if you contribute more than your deduction limit plus the $2,000 buffer, you must pay a tax of 1% per month on the excess contribution amount over $2,000.

The 1% per month tax penalty begins the month of the over-contribution. 

  • For example, let’s say you over-contributed to your RRSP by $7,000, as in the example above. 
  • In this case, you would be left with an over-contribution amount of $5,000. This number is derived after subtracting the $2,000 buffer ($7,000 – $2,000 = $5,000).
  • With a 1% monthly penalty, you would be charged $50 every month ($5,000 x 1%) on your excess contributions until they’ve been withdrawn or waived. 

Reasons The Penalty Tax May Be Waived

In certain cases, you won’t be subject to the 1% penalty even if you over-contribute. This includes: 

  • You took out the excess contribution amount before month-end when it was made.
  • You contributed to an eligible group plan.

What Can You Do If You Over-Contribute To Your RRSP?

If you have over-contributed, don’t worry, there are some things you can do to help minimize the penalties and stress. 

The first thing you should do is to act fast. The quicker you notify the CRA of your mistake, the fewer penalties you will face and the easier this whole situation will be for you.

As far as what you do and tell them, there are a few choices at your disposal. The first is to simply settle the penalty tax by paying the CRA what you owe them, and the second is to withdraw the amount you have over-contributed and ask the CRA if they will waive the penalty. 

Let’s now take a closer look at each option.

Option #1 – Pay The CRA Penalty Tax

The first option is, of course, to just pay the penalty when you report your mistake to the CRA. All you need to do is report your mistake and pay the tax by filling out the T1-OVP form. The big benefit of this option is that it is a very simple and quick process. 

How To Pay The CRA Tax Penalty? 

To pay your tax penalty for over-contributing to your RRSP, you must complete Form T1-OVP, 2022 Individual Tax Return for RRSP, PRPP and SPP Excess Contributions. Then send it to the appropriate tax centre. This form calculates how much you owe in penalty taxes. You’ll be asked to provide the following information on the form: 

  • Full name and address. 
  • Social insurance number (SIN)
  • Contributions to your RRSPs that you did not and will not deduct on your income tax returns from 1990 to 2022.
  • Total RRSP contributions you deducted.

When Must You Report Your RRSP Over Contribution To The CRA?

You must report RRSP over-contributions  90 days after the last day of the tax year when it happened. If you don’t report over-contributions within this time frame, you will be charged an additional 5% on the outstanding taxes, plus an extra charge of 1% per month.

For instance, let’s say you owe a penalty of $200 as a result of over-contributing your RRSP. If you miss the 90-day time frame to pay this penalty fee, you’ll be charged an additional $10 ($200 x 5%), along with another $2 per month while the return is late, up to a maximum of 12 months.

Option #2 – Withdraw The Excess Contributions And Ask CRA To Waive The Penalty

If you realize that you’ve over-contributed to your RRSP and withdraw the over-contribution, the CRA may be willing to waive the penalty. In this case, you should get in touch with the CRA right away to have this mistake fixed 

However, to have your over-contribution penalty waived, you must have a reasonable explanation of why the over-contribution was made in error. Then, you must take timely steps to withdraw the over-contribution. Only after these conditions have been met will the CRA consider waiving the penalty fees. 

How To Ask The CRA To Waive Your Tax Penalty

If you meet the conditions as explained above, you must submit a written request to the CRA to have the over-contribution penalties waived. Your letter should include a detailed explanation of why the over-contribution was made and why it should be considered a reasonable mistake. 

If possible, include documents that back your claim, including statements that show that you’ve made the necessary withdrawals from qualifying registered accounts.

Can You Carry Forward RRSP Over-Contributions?

No, you cannot carry over any over-contributions you make to your RRSP. If you want to avoid or minimize penalty fees, you must withdraw the excess contributions as soon as possible. 

To help you sort this out, get in touch with your tax specialist to find out exactly what the excess contribution was, and withdraw it right away. You can also find out what your deduction limit is on your Notice of Assessment.

To avoid over-contributing in the future, consider keeping track of your contribution room each year. There are several RRSP calculators available online to help you calculate your optimal RRSP contribution.

Bottom Line

While it can be frightening to over-contribute your RRSP, there are things you can do to minimize the damage. As long as you act quickly and report the over-contribution to the CRA and are honest with them, the penalties you face shouldn’t be that severe and will be a learning experience for you going forward in your life.

RRSP Over Contribution FAQs

What is an RRSP?

An RRSP is a type of tax-sheltered savings account for retirement. One of the biggest benefits of keeping retirement savings in an RRSP is that you’re deferring the taxes on the money you add to the account. Contributions made to an RRSP account are also tax-deductible, which can help you lower your income tax payable in a given year.

Where can I check my contribution room?

If you don’t feel like doing the calculations the old-fashioned way, you can see your contribution limit on Line A of your most recent Notice of Assessment. You can also use an online RRSP calculator or log into your CRA account to find your contribution limit. 

What happens when I withdraw RRSP over contributions?

When you withdraw your RRSP over-contributions, you will still be taxed, since these withdrawals are considered taxable income. Your financial institution will withhold a certain percentage, depending on the amount withdrawn. Generally speaking, this can be anywhere from 10% to 30%. 

Can you carry forward your unused contribution room?

Yes, you’re allowed to carry forward any unused contribution room and add it to the amount you can contribute for future tax years. 

What is the benefit of an RRSP?

One of the main benefits of an RRSP is that all contributions can be used to reduce income tax owed. Similarly, RRSPs become very helpful if you contribute when you are making more money (during your 30s, 40s, and 50s) and then withdraw after you retire. You will be taxed much less in that scenario than if you withdrew when you were in a higher tax bracket.
Kale Havervold avatar on Loans Canada
Kale Havervold

In his over six-year career as a professional writer, Kale has focused on writing about finance, technology, cryptocurrency, entertainment, and sports. Kale's work has been published on Yahoo, RentHop, the Regina Leader-Post, LoansCanada.ca, and ReboundFinance.com. Kale loves to create a wide variety of personal finance-related content. Including everything from how-to guides to featured articles, to advice pieces and everything in between. Whether he’s writing about the newest piece of technology or providing tips to help people with their finances, Kale is passionate about educating Canadian consumers and making sure they have the information they need to make the best decisions.

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