What To Do When You Over Contribute to Your RRSP

An 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 definitely 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-contributed to your RRSP.

What is an RRSP?

Before getting into what you would do if you over contributed to an RRSP, let’s take a closer look at what an RRSP is. An RRSP (which stands for Registered Retirement Savings Plan) is a type of tax-sheltered savings account for retirement. One of the biggest benefits of keeping retirement savings in an RRSP is that your money is free to grow tax-free in the account. Another huge benefit is that withdrawals are taxed as income when you withdraw them. Contributions made to an RRSP account are also tax-deductible, which can help you lower your income tax payable in a given year.

This second benefit becomes very helpful if you contribute to an RRSP when you are making more money (during your 30s, 40s, and 50s) and then withdrawing after you retire. You will be taxed much less in that scenario than if you withdrew when you were in a higher tax bracket.

This all sounds great (and it is), but there are some rules you need to follow. Most notably, there is a limit to how much you can contribute to an RRSP each year. The limit is determined by your annual earned income. Your contribution limit is a certain percentage of your prior years earned income. However the contribution amount must not exceed the cap limit, which changes from year to year. Also, if you don’t contribute your full amount in a given year, you carry that forward and can contribute more in upcoming years if you so choose.

Want to know if owing taxes to the CRA affects your credit score? Find out here.

How Much Can You Contribute to Your RRSP Each Year?

If you don’t feel like doing the calculations the old fashioned way, you can see your contribution limit on your most recent Notice of Assessment on Line-A or you can use an online RRSP calculator. Also, if you have a CRA account, you can log on and find your contribution limit as well. These locations can also help you know if you want to figure out if you have over contributed or not. You won’t receive notice that you over-contributed until it’s too late, so be sure to be proactive as it is up to you to check on these things and report any over contributions to the CRA.

Click here to learn about the RRSP Homebuyer’s Plan.

How to Fix Your Mistakes of Over-Contributing?

Now that you are up-to-speed on all things RRSP, let’s look at how to fix your mistake of over contributing. Despite the limits, it is indeed possible to contribute as much as you want to an RRSP. In fact, you are actually given an extra $2000 per year that you can contribute, but that money won’t be able to be deducted. However, if you over contribute by more than $2000, you will be penalized.

The penalties for over-contributing are equivalent to a 1% tax on your excess contributions per month. This penalty will also increase if your taxes are filed late, so be sure to be diligent and get your taxes in on time.

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 actually 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.

Still having trouble figuring out your RRSP? Read this

Option #1 – Pay the CRA the 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 in order to report your mistake and pay the tax is to fill out the T1-OVP form which will calculate the taxable amount and how much you must pay them to eliminate the mistake. The big benefit of this option is that it is a very simple and quick process. Whereas Option #2 could be a fairly long process, this one will get this mistake solved quickly. The con, of course, is that you are paying a penalty that has the potential to be quite hefty if you over contributed by a lot or didn’t report the over contribution right away.

Option #2 – Withdraw the Excess Contributions and ask CRA to Waive the Penalty

The second option is to basically ask the CRA to waive the penalty. In order to do this, you need to submit Form RC4288 and also write the CRA a letter that will explain why you over contributed, why it was an honest mistake and the steps you are taking to eliminate the over contributions. It is also a good idea to withdraw the over contributed amount to show them you are taking steps to eliminate the problem. While they won’t always rule in your favour, many think it’s worth a shot. Of course, the benefit of this option is that you might be able to get the penalty waived, but the con is that it could take a while to hear back, and it might not even get waived, which would still leave you with a penalty to pay.

Which Option is Best For Me?

As for which option you select, that is up to you. The first option is normally a fairly quick resolution and if your overcontribution was small, it might be worth it to just pay the small penalty and move on. However, if you cannot afford to pay your penalty or want to try your luck with the CRA, the second option can potentially save you money as long as the CRA believes your reasoning for why you over contributed.

So, while it can be frightening to over-contribute to your RRSP, there are definitely 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 to them, the penalties you face shouldn’t be that severe and will be a learning experience for you going forward in your life.

Just make sure not to fall for the CRA Phone Scam.

In order to prevent these mistakes from happening in the future, it is always a good idea to keep a note or reference somewhere that tells you your contribution limit. Also, keep track of how much and when you contribute to your RRSP to ensure that you are not going over your limit in a given year.