What is an RRSP over contribution?

Older lady looking at paper and calculator

A Registered Retirement Savings Plan (RRSP) is a very popular way for Canadians to save for their retirement with some attractive tax breaks that help their savings and investments grow faster. It’s so popular that around half of Canadians will contribute to one this year.

If you’re one of the 21% of Canadians who intend to make the maximum RRSP contribution this year, you’ll need to know about the consequences of RRSP over contributions. It can be quite costly to make an over contribution to your RRSP, so it pays to try and avoid doing it. However, if you do make an over contribution to an RRSP, you need to know how to minimize the RRSP over contribution penalty.

In this article, we’ll cover the RRSP over contribution limit and how to calculate RRSP over contributions. We’ll also explore RRSP over contribution examples and how to fix over contributions to an RRSP, as well as suggest an RRSP over contribution strategy that will help ensure it doesn’t happen to you.

We’ll also tackle some frequently asked RRSP over contribution questions. These will include; what is a CRA RRSP over contribution; what happens if you go over your RRSP contribution limit; and can I carry forward RRSP over contributions? We’ll also answer what happens if my RRSP over contribution is under $2,000 and what is an RRSP over contribution carry forward?

What is RRSP over contribution limit?

RRSPs provide a considerable tax break whenever you make a contribution; every dollar you contribute reduces your taxable income by a dollar, so it could lead to a significant tax refund at the end of the year.

For this reason, the government limits the amount of money you can contribute, and a CRA RRSP over contribution can have considerable implications. Each year there is an RRSP over contribution limit – for 2024, it was either $31,560 or 18% of your earned income for the year, whichever was the lowest.

However, if there were any years when you didn’t make the full RRSP contribution allowable, the surplus amount is carried over to the next year. In theory, then, your RRSP contribution limit could be far higher than the annual contribution limit.

There are a couple of ways of finding out your RRSP contribution limit for any given year:

  • Your annual tax notice of assessment will stipulate how much you can contribute to your RRSP.
  • Log into your CRA My Account, which will contain your current RRSP contribution limit.

Any amount you pay into an RRSP that is above that limit is considered an RRSP over contribution. What happens if you go over your RRSP contribution limit? The CRA treats RRSP over contributions seriously and you could end up having to pay a penalty, so it’s important to know how to calculate your RRSP over contribution and also how to fix an over contribution to an RRSP.

It’s also helpful to understand that an RRSP over contribution in the first 60 days of the year could be part of your RRSP contributions for the previous tax year. Therefore, you could delay an RRSP over contribution in the first 60 days of the year so that it counts for the current rather than previous year. This could help you to avoid making an over contribution to your RRSP.

RRSP over contribution penalty

The CRA allows a buffer for any RRSP over contribution under $2,000. What this means is that you won’t be charged a penalty for any over contribution to an RRSP under $2,000, though you won’t receive a tax break on that over contribution. Be aware, though, that this $2,000 is a lifetime amount; you can’t over contribute to your RRSP by $2,000 every year without a penalty.

Any RRSP over contribution amount above $2,000 will be subject to a tax of 1% every month that your RRSP contains this amount. You would therefore need to fill in the appropriate RRSP over contribution form and make an RRSP over contribution withdrawal of at least the amount that brings your over contribution to under $2,000.

How to pay an over contribution penalty? You would need to fill in the RRSP over contribution form T1-OVP and send it to your tax centre. Then, you’d have to pay the tax within 90 days after the end of the year when you made the RRSP over contributions.

The CRA may waive the RRSP over contribution penalty if:

  • You made an RRSP over contribution withdrawal before the end of the month in which you made the over contribution.
  • The RRSP over contributions were due to a reasonable error.
  • You have taken or will take steps to withdraw the excess contributions.

To set this process in motion, you would need to fill in and submit form RC2503. You can’t have an RRSP over contribution carry forward to the next tax year. You would have to withdraw the surplus amount to stop the penalty tax.

How to calculate an RRSP over contribution?

First of all, find out what your RRSP contribution is for the current tax year either by looking at your notice of assessment or your My Account.

Next, calculate all of the RRSP contributions you have made or are planning to make in the year. Make sure you include all of your RRSPs, including your personal RRSP and any workplace RRSPs.

Subtract the total RRSP contributions from your RRSP contribution limit. If the calculation is a positive number, you have not made an over contribution to an RRSP. If the calculation is a negative number, you have made an RRSP over contribution.

RRSP over contribution examples

Let’s look at the examples of Pierre and Sarah.

  1. Pierre’s RRSP contribution limit for the year is $44,000.
  • He receives a substantial inheritance and decides to contribute $60,000 to his personal RRSP.
  • His RRSP over contribution is $16,000.
  • He will pay 1% tax per month on $14,000 ($16,000 minus the $2,000 buffer).
  • He will pay $140 per month until he makes an RRSP over contribution withdrawal of at least $14,000.
  1. Sarah’s RRSP contribution limit for the year is $24,000.
  • She decides to open a personal RRSP which, along with her work RRSP, adds up to $25,500.
  • Her RRSP over contribution is $1,500.
  • This is below the $2,000 buffer, so she won’t be charged a penalty.

RRSP over-contribution strategy

There are several steps you can take to ensure you don’t make RRSP over contributions.

  • Be aware of your RRSP contribution limit for each year.
  • Calculate all expected RRSP contributions for the year.
  • If the contributions will exceed the contribution limit, reduce the size of your contributions until they come in under the limit.
  • If you have any unused RRSP contributions, these can be used to offset your RRSP contributions for the current year.
  • If you accidentally make an RRSP over contribution, withdraw it at once and contact the CRA to try and have the penalty waived.

RRSP over contribution FAQs

What happens if you go over your RRSP contribution limit?

You’ll be charged a monthly 1% tax for the amounts that are above your RRSP contribution limit plus the $2,000 buffer. You can stop the penalty charge by withdrawing the excess RRSP contribution.

Can I carry forward RRSP over contributions?

No, you would need to withdraw the amount of your over contribution to stop the penalty charges.

Are you charged for RRSP over contributions under $2,000?

If this is the first time you’ve made RRSP over contributions, you won’t be charged a penalty for over contributions up to $2,000, though you won’t receive a tax break on that amount. If you have previously made over contributions of $2,000, you will be charged a penalty.

What if your RRSP isn’t enough for retirement?

Many Canadians find that maintaining a comfortable lifestyle during retirement can be tricky. Even with income from the Canada Pension Plan, Old Age Security and a company RRSP/personal RRSP, many people find that the cumulative income just isn’t enough to give them the kind of retirement that they’d planned.

If you’re a Canadian homeowner aged 55-plus, you could boost your retirement income with a reverse mortgage. This is a type of loan that’s secured against your home, which allows you to cash in up to 55% of the value of your home. You can receive the money in either a lump sum or regular monthly payments.

There are some key advantages of a reverse mortgage for retirees:

  • Reverse mortgages are typically easier to qualify for than conventional mortgages, lines of credit or other loans.
  • You don’t have to repay the loan until you sell your home or move out, so it won’t have a negative impact on your retirement income.
  • Because there are no mortgage payments to make, you won’t lose your home because of defaulting on payments.

You can find out how much you could qualify for with a CHIP Reverse Mortgage by calling us at 1-866-522-2447 or by using our reverse mortgage calculator

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