Did you make a mistake and over-contribute to your RRSP? Then you need to know the implications of this error and what you can do to fix it
Canadian citizens who have Registered Retirement Savings Plans (RRSPs) are required to make contributions to the account every year to build their retirement fund. If a plan holder doesn’t meet the contribution limits for a given year, the remaining contribution room is simply carried over to the next year.
While this could mean that the plan holder can give less than their RRSP’s contribution limit and let it carry over indefinitely, this is not advisable, nor can it be sustainable. Putting less than the RRSP contribution limit is common, but what happens if a plan holder over-contributes to their RRSP? Is there an RRSP over-contribution penalty? Does the RRSP over-contribution carry forward? What is the best RRSP over-contribution strategy?
In this article, WealthProfessional offers insights on this unusual situation and shares tips on how to fix an RRSP over-contribution.
What is an RRSP over-contribution?
An RRSP over-contribution happens when a plan holder gives more to their RRSP or spousal RRSP than their deduction limit and the lifetime buffer of $2,000. These include any direct contributions made to:
- an RRSP
- a Specified Pension Plan (SPP)
- a Pooled Registered Pension Plan (PRPP)
Why do RRSP over-contributions happen?
In most cases, over-contributions happen due to human error. This can happen when:
- the plan holder’s employer makes automatic contributions and is unaware of their limits
- the plan holder is part of a group RRSP and is likewise unaware of their limits
- a company performance bonus is directly deposited into an RRSP, going over the limit
- the plan holder is simply unaware of their limits and unknowingly over-contributes
Situations like these are the rationale behind the $2,000 “buffer” to keep over-contributions low. Why is it important to ensure that you do not over-contribute to your RRSP? That brings us to...
The RRSP over-contribution penalty
Gaps between RRSP limits and lower RRSP contributions (RRSP contribution room) are simply carried forward to the future years without any penalties. This is not so with over-contributions.
There is an RRSP over-contribution penalty equal to 1% of the amount that is over the RRSP limit plus the $2,000 buffer. This is called the “overage tax”. How does this work?
Let's assume that a plan holder exceeded their RRSP contribution in February 2023 by $8,000 and allowed the over-contribution to stay in their account until January 2024. Their penalty or overage tax is computed this way:
Over-contribution of $8,000 - $2,000 buffer = $6,000 x 0.1 (1%) = $660 in overage taxes
This means that the plan holder must pay $60 per month for the 11 months the over-contribution stayed in their RRSP. They must also pay this tax within 90 days of the end of the calendar year or face additional interest payments and penalties.
If the plan owner does not pay the penalties within the 90-day grace period, the charges will compound interest daily. This will include a late filing penalty of 5% of the balance along with another 1% of the balance for every month of late filing.
How do you fix an RRSP over-contribution?
There is a step-by-step process by which a plan holder can fix this situation. Here’s how to do it:
1. Decide whether to withdraw the over-contributed amount or not
The Canada Revenue Agency (CRA) imposes a 1% penalty on the amount that's more than the contribution with the $2,000 buffer added. However, the plan owner is not obligated to withdraw the excess amount.
In fact, plan owners can choose to leave the excess money in the account if the RRSP’s investments earn more than the penalty. Economic conditions and market trends must be right for this to be of real benefit. Plan owners should consult with a financial advisor and be familiar with the workings of the RRSP before taking this route.
2. Ask the CRA to waive the withholding tax if you decide to withdraw the money.
If keeping the excess of the contribution in the RRSP is not a sound strategy, then make an RRSP over-contribution withdrawal.
This is what the process will be like:
- fill up Part 1 of Form T3012A. This is entitled as the Tax Deduction Waiver on the Refund of your Unused RRSP, PRPP, SPP, or RRIF Contributions in (appropriate year). Take this to your RRSP administrator to calculate the amount they can refund without withholding tax
- in Part 2 of the form, write down which RRSP account to withdraw the over-contribution from and which account to transfer it to
- attach proof of the contributions; this can include certified copies of receipts. Send four copies of the forms to the CRA
- once the CRA approves the waiver, you will receive three signed copies
- send these signed copies to the financial institution handling the RRSP
- the institution handling the RRSP should provide you with two copies after completing withdrawal of the over-contributed amount
If the withholding tax is insignificant, you simply may withdraw the over-contribution. The withholding tax will be included in your annual tax return.
If the over-contribution is a large amount, withdraw it in amounts of less than $5,000 to reduce the withholding tax.
3. Request the CRA to remove the 1% monthly excess contribution tax
The CRA is likely approve the request, but only if:
- the excess contributions were caused by a reasonable error
- you are withdrawing or have withdrawn the excess contributions
To make a request, use Form RC4288 Request for Taxpayer Relief – Cancel or Waive Penalties or Interest. You may also write a letter to the CRA explaining:
- why the error was made, and why it’s reasonable to have the penalties waived
- steps or measures you have taken to fix the excess contributions. Include copies of the appropriate documents (like the RRSP statements) proving that you have withdrawn the excess funds, and any letters explaining the error.
4. Submit Form T1-OVP for the RRSP Excess Contributions
If the CRA finds that:
- the unused contribution room is a negative value
- you got money as a gift in your RRSP
- you contributed to your spouse or partner’s RRSP without getting a tax deduction
the plan owner must then obtain, fill up, and submit Form T1-OVP to the CRA. This form is known as the Individual Tax Return for RRSP, PRPP and SPP Excess Contributions.
5. Do your annual tax return
Submitting your tax return is required if you chose to pay the withholding tax on the over-contribution.
When filling out your tax returns, do the following:
- enter the over-contribution amount on Line 11 of T476, Line 232 on the return. You will have to use a separate T476 for each year of over-contributions
- write the amount in Box 20 of the T4RSP Statement of RRSP Income, Line 129 on the return
- submit the T476 and T4RSP with your tax return to the CRA
If you did not pay the withholding tax and filed the T1-OVP already, then complete your tax return as normal.
How to prevent future over-contributions to the RRSP
To avoid future hassles, it is best to ensure that the plan holder does not repeat over-contributing to their RRSP. Here are some measures plan holders can take to avoid repeating this situation:
1. Trace all the sources of RRSP funds every month
This can include gifts, bonuses, or even tax refunds that may make their way into the RRSP. Be sure the amounts do not cause the plan holder to exceed their RRSP contribution limits.
2. Track the Notice of Assessment and RRSP contributions online
Plan owners can use the CRA’s portal CRA My Account to check their exact contributions. They may also refer to their NOA after filing their tax return to check the important amounts.
On the NOA, RRSP holders can check the sections that detail their available contribution room. Any excess contributions also appear on the NOA – refer to the previous section in this article on excess contribution withdrawals.
3. Withdraw any excess contributions immediately and contact the CRA.
Should a plan owner discover that they have gone over the contribution limit, it’s best to withdraw the excess amount. After that, they should contact the CRA for assistance in filing the appropriate forms.
This short video explains why it’s best to withdraw the over-contribution as soon as possible. The penalty of 1% may seem small, but there are additional penalties. The penalty amount accrues compound interest as well.
RRSP holders should check their NOAs and work with their RRSP administrator to ensure they make contributions well within RRSP limits.
4. Join special RRSP lending programs to avoid over-contributing.
If you do not own your own home, you can use the RRSP’s Home Buyers Program (HBP) to purchase your own home. You can also take out a loan to fund further learning for yourself or your spouse.
Loans like these from the RRSP are significant enough to prevent plan holders from over-contributing – just make sure they align with your financial goals.
Understanding and managing RRSP over-contributions
Making over-contributions to an RRSP can happen sometimes. They can be due to simple human error on the plan owner’s part, especially if they are trying to maximise the benefits of the RRSP. Other causes can include unexpected windfalls like a financial gift, tax refunds or company incentives that went into the RRSP.
A plan holder need not worry too much about this issue, unless the over-contribution is a substantial amount. The best strategy to adopt if this occurs is to check the RRSP account or NOA regularly, and immediately withdraw any excess amount to minimize penalties. RRSP should also contact the CRA in this case.
Which of these tips will you follow to prevent RRSP over-contributions? Let us know in the comments
