$ 2 000 RRSP Overcontribution Explained

With tax season in full swing, people are rushing to make last minute contributions to their RRSPs before the March 1st deadline.

Did you know CRA allows for a one-time $ 2 000 overcontribution to an RRSP? Let’s see how it works.

RRSP Yearly Contribution Amount and Room

The maximum yearly contribution amount to your RRSP is either 18% of your earned income from the previous tax year, or a maximum $ 31 560.00 for 2023, whichever comes first.

Your earned income is what you declared on your tax return.

In addition to this, if you haven’t contributed the maximum amounts allowed from previous tax years, these amounts carry-over from one year to the next. They constitute your contribution room.

CRA will advise you of the total amount you can contribute to your RRSPs on your Notice of Assessment -NOA-.

Withdrawals and an employer pension plan will impact the amount you can contribute. Always check your NOA!

In addition, CRA allows you to overcontribute $ 2 000.00 without penalty, interest or tax consequences. Yes, you’re reading correctly.

What to Know About the $ 2 000 Overcontribution

CRA allows for the extra $ 2 000 contribution to act as a buffer for potential errors when contributing to an RRSP.

The tax agency recognizes people can make mistakes. Most people have several RRSPs and it can be challenging to keep track of all the contributions.

Although you won’t pay any penalty, interests or tax on the $ 2 000 overcontribution, you won’t be able to offset it against your income.

This overcontribution is also a one-time occurrence only. It never resets.

Should You Overcontribute $ 2 000?

If you are in a position of being able to overcontribute, you should do it. Although you can’t deduct it from your income, you’ll benefit from the power of compounding.

The average return of the TSX is about 9.5%, before taxes and inflation.

If you leave that amount for 20 years at that rate, it will balloon to just over $ 12 000. Nothing to sneeze at. If you leave it for 35 years, you’ll have just over $54 000!

What if You Overcontribute More than $ 2 000?

For each dollar over the $ 2 000 buffer, CRA will assess a 1% monthly penalty until the amounts are withdrawn. When you withdraw the excess amounts, you’ll be taxed accordingly.

You’ll also need to file a T1-OVP form. If you don’t, CRA will charge you an extra 5% penalty.

Final Word

The $ 2 000 RRSP overcontribution is one the few loopholes allowed by CRA. If you can, you should probably take advantage of it.

That being said, make sure to check your NOA to avoid costly surprises. Ultimately, there is no free lunch. CRA will always get its share of your hard-earned money.

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