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A Registered Retirement Savings Plan (RRSP) is a great way to save for retirement. It offers flexible investing with tax-free investment growth in the plan. Withdrawal(s) usually happens during retirement when you are in a lower tax bracket resulting in lower tax withholdings. As a bonus, your RRSP contributions reduces your taxable income. The best part of the bonus, is you pay less taxes or get a refund. Though RRSPs are mainly used for retirement savings, other benefits include participating in the Home Buyer’s Plan or the Lifelong Learning Plan.
While these features make RRSPs attractive to many investors, you need to be aware contribution limits are set annually & if your RRSP over-contribution exceeds $2000, you will be penalized.
RRSP Contribution Limit
You total annual RRSP contribution limit for all plans combined is 18% of your prior year’s income or the maximum allowable limit of $29,210 (2022), whichever is less. This is within all plans, which means RRSPs you purchase individually (including spousal RRSPs) or through certain group plans.
The government sets a deduction limit each tax year however, not everyone uses it. As a result, all unused contributions are carried forward from prior years. Therefore, you won’t have an RRSP over-contribution unless you:
– contribute more than your annual limit &
– your carry forward
– plus the $2000 over-contribution allowance.
Check out your MyAccount for unused carry forward information. Don’t have an account? You can sign up from links on the MyAccount page.
What Happens if You Over Contribute?
If you over-contributed to your RRSP you must:
– fill out & file a T1-OVP Individual Tax Return for RRSP, PRPP & SPP Excess Contributions
– file it within 90 days of the end of the calendar year to avoid additional penalties & late charges.
– file it with a 1% tax penalty
This just touches the surface on RRSP over-contributions & what to do about it. Contact us & talk to one of our tax specialists. Our tax specialists lookout for this when we filing your taxes, bringing it to your attention to minimize penalties & help plan for future contributions.