RRSP rules can be confusing. With all the deadlines and limits, you might wonder, “How can I maximize my retirement fund and tax deduction without going over my limits and incurring a penalty?”
We want you to maximize your RRSP’s potential without stepping outside CRA contribution rules. But if you do, don’t panic. There are ways you can address the issue and get back into your RRSP groove.
Here’s what happens when you make excess contributions to your RRSP and how you can resolve over-contribution penalties.
- Keep track of your RRSP deduction limit each year by checking your Notice of Assessment (NOA) and your CRA My Account online.
- Know that you have a cumulative lifetime over contribution limit of $2,000 that acts as a cushion in case you mistakenly exceed your RRSP deduction limit. You will not receive a tax deduction for these excess contributions.
- If you have mistakenly over-contributed to your RRSP, fill out a T3012A form and submit it to the CRA. It explains your over contribution and makes a request to withdraw the excess amount.
What is an RRSP over-contribution?
Anytime you go over your RRSP contribution limit, it sets off sirens at CRA headquarters. (Well, not literally, but you get the idea.)
For instance, if your RRSP limit for 2022 was $29,210, but you contributed $34,000, you would have over-contributed to your RRSP by $4,790.
Why do RRSP over-contributions happen?
You might over-contribute to your RRSP if you don’t know your RRSP deduction limit.
If you’re part of an employer-sponsored savings plan, such as a group RRSP, and receive employer-matching contributions, you may not realize those matching contributions count toward your RRSP deduction limit.
How do you know if you over-contributed to your RRSP?
Once you file your taxes for the previous year and claim your RRSP deduction, you’ll receive a Notice of Assessment (NOA) from the CRA. If you look at your NOA, you’ll see your RRSP deduction limit (aka the maximum amount of money you can invest in your RRSP) for that year.
Alternatively, you can log onto your CRA My Account. Either will tell you if you made an “oops!” and owe taxes on over-contributions.
How much over-contribution to an RRSP is allowed?
Thankfully, taxpayers over the age of 19 have a $2,000 maximum lifetime over-contribution limit. This is essentially how much you’re allowed to over-contribute during your entire life, which can act as a buffer in case you mistakenly over-contribute to your RRSP.
To be clear, you won’t be able to claim a tax deduction for that $2,000 over-contribution, but you won’t face a penalty for it either.
What is the penalty for RRSP over-contribution?
Taking into account your $2,000 lifetime over-contribution limit, RRSP over-contributions are taxed at a penalty of 1% per month.
For example, if you over-contributed to your RRSP by $4,790, you’d subtract $2,000 and be left with an over-contribution of $2,790.
The 1% penalty means that you’d owe a tax of $27.90 per month on those excess contributions until they’ve been removed or the CRA waives the penalty.
How do you fix over-contributions to your RRSP?
If you went over (it happens!), honesty is the best policy.
First, familiarize yourself with the T3012A form because you’ll need to fill it out before doing anything else. This form tells the CRA that you accidentally went over your RRSP deduction limit and asks for approval to take out the excess amount from your RRSP provider.
Here’s how it works:
- Fill out parts one and two of the form and then send four copies to your local tax centre.
- After the CRA has approved the amount your RRSP provider can refund (without witholding tax), the CRA will fill out part three of the form and return three copies to you.
- Once you receive the forms back from CRA (with part 3 filled in), fill out part four and send all three copies to your RRSP provider.
- Your RRSP provider fills out part five and returns two copies to you.
Can you carry forward RRSP over-contributions?
No. Instead, you’ve got to fix it ASAP. That means taking out any RRSP over-contributions to avoid paying the penalty of 1% per month.
If this sounds overwhelming, we got your back—TurboTax can help you locate your personal deduction limit on your Notice of Assessment, keep track of your contribution room and deductions going forward, and calculate your optimal RRSP contribution using the RRSP calculator.
Your RRSP is a key part of your retirement plan, but it’s important familiarize yourself with the contribution rules before any problems come up. This is the best way to avoid RRSP over-contributions (and extra paperwork!) so you’re set up for your golden years.
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Frequently Asked Questions
Yes. If you made an RRSP over-contribution, your first step is to tell the CRA ASAP.
You must report it 90 days after the last day of the tax year when it happened. Otherwise, you might end up paying more in late penalties.
The CRA treats late reporting and payments like Blockbuster treated late movie returns—to the tune of 5% of the taxes you owe, plus an extra 1% per month charge.
For example, let’s say Rasheem over-contributed to their RRSP last year and owes a penalty of $300. They don’t pay the penalty within the 90-day window. As a result, they now owe $300, plus an additional $15 in late fees ($300 x 5%), plus an additional $3 per month that the return is late (up to a maximum of 12 months).
Yes, you can remove the excess contributions yourself by withdrawing from your RRSP. But your financial institution will withhold taxes of between 10%-30%, depending on how much you withdraw. That’s because RRSP withdrawals are considered taxable income.
Get in touch with the CRA as soon as you’ve spotted the over-contribution error and explain your mistake. They may work with you to waive or adjust any penalties if you take immediate steps to remove your over-contributions.