I am new to Canada and have little knowledge about the RRSP system. Could you guide me? I over-contributed over $2,000. What is my best option to avoid a fine?
What is the RRSP contribution margin?
The room to contribute to your Registered Retirement Savings Plan (RRSP) is generated each year based on your earned income from the previous year. For most people, earned income is income from employment or self-employment, but it can also include other sources, such as net rental income. This year’s RRSP room is 18% of last year’s earned income, up to a cap of $29,210 for 2022.
RRSP space is cumulative and is carried over every year.
How much is too much?
You are allowed to contribute too much to your RRSP – a contribution that exceeds this year’s RRSP chamber – by up to $2,000. If you contributed more than $2,000 to your RRSP, Mo, you will be fined. The RRSP penalty for excess premium is 1% of the excess premium for each month that remains.
What to do if you contribute too much to an RRSP?
If your contribution is too high, here are the steps to consider.
The overpayment must be reported by submitting a T1OVP Individual Tax Return for RRSP, PRPP and SPP Deductible Contributions. Returns are a painstaking process, but are the primary method of reporting an overpayment to the Canada Revenue Agency (CRA). If this return is not filed, CRA may notice, often a year or two later, that an excessive contribution has been paid. If the overpayment lasts for several years, the fine of 1% and the associated overdue interest can increase considerably.
When you realize that you have contributed too much to your RRSP, Mo, you can fill out a T3012A tax deduction exemption for the refund of your unused RRSP, PRPP or SPP contributions from your RRSP. Once filed with and approved by CRA, the form can be provided to the financial institution holding the RRSP to withdraw the overpayment without any withholding tax. In the meantime, however, your overpayment will continue to incur a monthly penalty of 1%.
Otherwise, withholding tax is required on an RRSP withdrawal, at the rate of 10% up to $5,000, 20% on withdrawals between $5,000 and $15,000, and 30% on withdrawals over $15,000. The federal tax withholding is 5%, 10%, and 15% in Quebec, respectively, with 15% provincial tax withheld as well. If you prefer to just take the withdrawal and stop the overpayment penalty, withholding tax will be withheld. However, this tax can be recovered when you file your tax return, Mo.
This post What to Do If You Contribute Too Much to Your RRSP
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