I over-contributed to my RRSP in the past two years for which I filed the proper form and paid the interest fee on the over-contributed amount. I think I might exceed my RRSP room this year too. Does over-contribution to RRSP raise any issues?
For those who are not aware, when you deposit money into a registered retirement savings plan (RRSP) you get an income tax credit on the money you deposit. Basically, when you file your income taxes at the end of the year, any money you put into your RRSP is subtracted from your income on the tax forms so it acts as though you made less money, meaning you get taxed less.
Each year there is a limit on how much money you can deposit into your RRSP account. This amount is usually 18% of your last year’s income, plus any contribution room left over from the previous year. We talked about RRSPs and how they work in an earlier post.
So, what happens if you go over the limit and try to put more money into your RRSP account? According to the Canada Revenue Agency’s website:
Generally, you have to pay a tax of 1% per month on excess contributions that exceed your RRSP deduction limit by more than $2,000 unless you: withdrew the excess amounts before the end of the month when the excess contribution was made [OR] contributed to a qualifying group plan.
You will also be required to fill out a T1-OVP form to document the over-contribution.
Basically the only practical drawback to putting too much money into your RRSP is you end up paying more taxes and filling out more paperwork. You’re also not going to get income tax credits on the extra money you invested in the RRSP.
In short, there is no benefit to over-contributing. The drawbacks are there are taxes and paperwork to fill out. There really isn’t any upside. The CRA might also start to wonder, if you keep over-contributing, why you do this and investigate your finances. Anyone can make a mistake once and over-contribute. But once you’ve corrected the mistake, why would you do it again? And then again?
The person asking the question said “I might exceed my RRSP room this year too.” I’m not sure why you’d not be sure OR why you’d know it was possible you’d go over the limit and continue to deposit money into your RRSP account anyway. If you are unsure what your limit is for the year, you can sign into your on-line CRA account and check your RRSP deduction limit. Also, if your employer is depositing money for you, check how much they have contributed and, if it’s going to go over the limit, ask your employer to adjust their contribution amount.
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