No RRSP Contribution Room and still Want to Contribute more?

Long term savings are a solid portion of most Canadians over all investing portfolio. In the long term savings bucket, RRSP are usually the most effective way to gain safe returns for future needs. RRSPs are government registered tax deferred savings plans, which enable Canadians to efficiently and securely save for retirement. In order to receive the maximum benefit from an RRSP, a tax payer must be fully knowledgeable on all rules and regulations of said plan.

A maximum annual amount in which any a tax payer is allowed to contribute to their RRSP is published by the CRA prior to the end of the current tax filing year. The contribution limit of the upcoming 2020 tax filing is 18% of total earned income from the previous tax year. For taxpayers who are eager to contribute more than the designated contribution limit an overpayment is allowed with some stipulations.

An overpayment allows a tax payer to put more money into their RRSP than is deemed allowable according to the contribution limit. The CRA permits tax payers to over contribute a cumulative lifetime total of $2,000 to their RRSP and this over contribution will not result in any tax penalties or fees.

The $2,000 limit can be increased to $8,000 for anyone who had an over contribution prior to February 27, 1995. Though an over contribution is not deducted from income in the current year, the value offered to the tax payer is the ability to put additional cash into their RRSP, which means their money is able to compound and grow for a longer period of time.

Additional value can be derived from the over contribution rule if a tax payer is not able to entirely contribute the maximum allowable contribution in future years. In this case the over contributions will be deducted from the tax payer’s actual RRSP contribution in the year in which the total contribution is less than the contribution limit allowed. This will allow for the tax payer to make an additional over contribution in the future, if the means or funds are available.

If a tax payer over contributes passed the above stated regulations, a penalty tax of 1% per month will be applied to the amount over contributed. Over contributions above and beyond the regulations should be avoided as the penalties are greater than the rewards resulting from additional contribution to the savings plan. If a tax payer has made an over contribution in error or deliberately, they should contact the CRA to amendment the over payment. Through the routine tax filing process a withdraw of excess contributions is not included and the amendments must be negotiated and discussed with a CRA personnel.

Annual RRSP contributions help Canadians increase savings and decrease current tax expenses. This is a great strategy when trying to save for a comfortable retirement. With a contribution limit of 18%, most Canadians should be able to contribute a decent amount to their plan for the 2020 tax period and if this still does not satiate their saving desires they can take advantage of the over payment rule and further increase the potential of future gains.