Canadians can save for retirement by opening a registered retirement savings plan (RRSP). However, RRSPs have strict rules surrounding funding, including maximum contribution limits.
The team at Group Enroll this guide to explain what happens if you overcontribute to your RRSP. We will talk about overcontribution definitions and any tax implications of RRSP overcontributions.
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What is an RRSP Overcontribution?
In a nutshell, an RRSP overcontribution happens whenever you contribute more to your RRSP fund than the deduction limit and standard $2,000 buffer. In other words, RRSP overcontributions are a result of directly contributing to your fund more than the annually allowed limit.
How Do RRSP Overcontributions Occur?
The most obvious way that an RRSP overcontribution can occur is if you intentionally exceed the contribution limit while depositing funds. Sometimes, RRSP overcontributions can be a result of multiple employers contributing to a pension plan or failing to adjust your automatic pension contributions.
Note that if you have multiple RRSPs, the annual limit applies to deposits across all of them. That means if you deposit the maximum amount in one RRSP, you will have hit the limit for all RRSPs you hold, even if you have not contributed to your other accounts.
What Is My RRSP Contribution Limit?
Your RRSP contribution limit is the maximum amount that you can contribute to your RRSP per year. The government sets contribution limits each year as a percentage of your gross income up to a specific limit. For 2021, the maximum contribution room was 18% of gross income, up to $27,830.
The Canadian Revenue Agency (CRA) also has a $2,000 buffer limit above the maximum contribution limit. However, contributions within this $2,000 range are not tax deductible like other contributions are. You can check your deduction limit on your yearly notice of assessment the government sends to each taxpayer.
Contributions from those who are part of pooled registered pension plans (PRPPs) or simplified pension plans (SPP) have the same limit. The main difference is that, for PRPPs, employer contributions are optional.
RRSP Overcontribution Penalties
So, what happens if you overcontribute to your RRSP? If you are under the $2,000 buffer limit, nothing will happen. If you exceed that buffer, you will have to pay a 1% per month overcontribution penalty charge. You can avoid this penalty charge if:
- Your RRSP is part of a qualifying group plan, or
- You remove the excess contribution before the end of the month when you first made it
If you have an overcontribution penalty, you must file a T1-OVP Tax Return for Excess Contributions. The filing must include information about the dates and amounts of withdrawals and contributions. You must submit the form and pay any overcontribution penalties within 90 of the end of the tax year (usually in March).
If you remove the overcontribution, you will have to pay regular tax on the withdrawn amount.
If you fail to file the T1-OVP form within 90 days, you will have to pay an additional charge of 5% of your total balance and a 1% balance charge every month you fail to submit your return. The CRA may charge an additional penalty for repeat offenders.
RRSP Overcontribution Penalty Example
Let’s consider an example with actual numbers so you can see how contribution penalties work. Let’s say that your RRSP contribution limit for the current year is $15,000, and you contributed $18,000—$1,000 over the $2,000 buffer amount.
Further, say that you don’t notice the overcontribution for at least six months after filing last year’s taxes. In this case, the overcontribution penalty would be 1% of the balance per month—so $60.
Keep in mind that once you resolve the tax and penalty issue, the overcontributed amount will go towards the annual contribution limit for the next year. So if you overcontribute $1,000, that $1,000 goes towards next year’s limit. Pay attention to these roll-overs, or you may have to pay overcontribution penalties two years in a row.
Be warned: the CRA often does not catch overcontributions until a few years after the fact. At that point, overcontribution penalties can add up. You want to stay on top of your contribution limits to prevent compounding penalties.
Can The CRA Forgive Overcontribution Penalties?
Yes, the CRA can waive any penalties for RRSP overcontributions in some cases. If the overcontribution was the result of an honest mistake and you are taking reasonable steps to address the overcontribution.
You can make a written request to the CRA asking them to forgive your penalties by filling out form RC2503. Be sure to include all information relevant to the overcontribution, such as withdrawal dates, contribution amounts, and other financial statements.
How Can I Prevent RRSP Overcontributions
The most obvious way to avoid any penalties is to not overcontribute to your RRSP. Make sure that you collect and track all your RRSP contributions from over the year. Keep in mind that all contributions to any RRSP go towards the annual limit.
Here are a few things to keep in mind to avoid overcontributions.
- Your annual notice of assessment (NOI) should indicate your maximum RRSP contribution limit based on your previous year’s income. You can fill out Form T400A Notice of Objection if you want to dispute your notice of assessment.
- If you do happen to catch an overcontribution, make sure to withdraw the amount as quickly as you can – preferably before the end of the month.
- If you do accidentally make an overcontribution, address it as quickly as possible. The longer you wait, the larger your penalty and the harder it will be to resolve the issue.
RRSP Overcontribution FAQ
RRSP management can get somewhat confusing, so here are some of the most common questions we receive about RRSP overcontributions.
You can check your RRSP contribution limits on your CRA account. If you do exceed the limits, the CRA should send you a notice of assessment indicating an overcontribution occurred.
Yes, the CRA will charge compounding interest daily on contribution penalties starting the 91st day after the end of the previous fiscal year.
Like other kinds of tax penalties, you can pay overcontribution penalties at your CRA account online. You can also send a physical cheque to the CRA to pay off any penalties.
The CRA has a special exception for home buyers’ plans (HBPs). If you took money out of your RRSP for an HBP payment, you can say that the overcontributions are part of HBP repayment and eliminate any contribution penalty. You need to report the HBP repayment before the end of the fiscal year.
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