No RRSP Contribution Room and still Want to Contribute more?

  • 3 min read

Long term savings are a solid portion of most Canadians’ overall investing portfolio. In the long term savings bucket, RRSPs 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 a tax payer is allowed to contribute to an 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 an RRSP, which means 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 contributes over the stated limitation, 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. If a tax payer has made an over contribution in error or deliberately, they should contact the CRA to correct the over payment. A withdrawal of excess contributions is not an option with tax filing. This 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.

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Christopher - BSc, MBA

With over two decades of combined Big 5 Banking and Agency experience, Christopher launched Underbanked® to cut through the noise and complexity of financial information. Christopher has an MBA degree from McMaster University and BSc. from Western University in Canada.