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I’m new to Canada and have little knowledge of the RRSP system. could you guide me I overcontributed over $2,000. What is my best option to avoid a penalty?
—Mon
What is the RRSP Post Room?
The Contribution Margin for your Registered Retirement Benefit Plan (RRSP) is generated each year based on your earned income for 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 space is 18% of last year’s earned income, up to a 2022 limit of $29,210.
The RRSP space is cumulative and carries over each year.
how much is too much
You may override your RRSP — a contribution that exceeds this year’s RRSP space — by up to $2,000. If you contributed more than $2,000 in addition to your RRSP, Mo, you are subject to a penalty. The RRSP over-contribution penalty is 1% of the excess contribution for each remaining month.
What to do if you contribute too much to an RRSP?
If you have an over-contribution, here are the steps to follow.
The excess contribution should be reported by filing a T1OVP individual tax return for RRSP, PRPP and SPP excess contributions. Returning is a tedious process but the primary method of reporting an overpayment to the Canada Revenue Agency (CRA). If this declaration is not submitted, the CRA can often determine a year or two later that an overcontribution has been made. If the over-participation lasts several years, the 1% penalty and the associated interest on arrears can add up.
If you find that you have contributed too much to your RRSP, Mo, you can complete a T3012A Tax Deduction Waiver for a refund of your unused RRSP, PRPP or SPP contributions from your RRSP. Once the form is submitted to and approved by the CRA, it can be made available to the financial institution holding the RRSP to withdraw the excess participation without withholding. In the meantime, however, your over-contribution will continue to be subject to a monthly penalty tax of 1%.
Otherwise, an RRSP withdrawal is subject to withholding tax of 10% up to $5,000, 20% for withdrawals between $5,000 and $15,000, and 30% for withdrawals over $15,000. The state withholding tax in Quebec is 5%, 10% and 15% respectively, with 15% of the provincial tax also withheld. If you prefer to just make the withdrawal and stop the over-contribution penalty, a withholding tax will apply. However, this tax can be refunded when you file your tax return, Mon.