How to fix an overcontribution to an RRSP or TFSA

It can be easy to exceed the contribution limit for your registered retirement savings plan (RRSP). Especially if you’re rushing to get your contribution in before the deadline.

It’s also not hard to put too much in your tax-free savings account (TFSA). 

If you make either error, don’t panic! There are ways to address an overcontribution to an RRSP or TFSA.

RRSP overcontributions: How they happen

You can contribute as much as 18% of the income you earned in the previous tax year to your RRSP. There is an annual maximum, plus any unused contribution room carried forward from previous years.

That can be a lot of money. So how do people end up exceeding these limits?

“Overcontributing is easy to do. Especially if you’re in a group RRSP or making automatic contributions,” says Bruce Ball, former VP at Chartered Professional Accountants Canada. 

Having a performance bonus deposited straight into your group RRSP could be an issue. It could cause an issue with your registered pension plan contributions. Every dollar contributed to a pension lowers your RRSP contribution room by the same amount. This is a pension adjustment (PA).

The best way to find out how much you can put into your RRSP? Check the Notice of Assessment you received from the Canada Revenue Agency (CRA). It lists your contribution limit for the current tax year and includes information about your PA. You can also find this information on your CRA My Account page.

How RRSP overcontribution penalties add up

With an RRSP overcontribution, the CRA levies a monthly 1% “overage tax” on anything above a $2,000 “buffer.” This is to protect you from small errors.

These overage taxes can add up fast. Also, the CRA may not alert you that you’ve exceeded your limit right away.

Let’s say you exceeded your 2023 RRSP limit by $8,000 in February. You then left the extra cash in until January 1, 2024. You’d pay 1% on $6,000 of your overcontribution — $660, or $60 per month times 11 months. And you must pay the overage tax within 90 days of the end of the calendar year. Otherwise, you may have to pay additional interest and penalties.

How to fix an RRSP overcontribution

One option for addressing an overcontribution could be to do nothing. This may be a good approach if your overcontribution happened late in the year.

“With RRSPs and TFSAs, your overcontribution might disappear the next year, when you get more [contribution] room,” says Ball. “In that case, decide whether you want to deal with the hassle of taking the money out. Especially if it isn’t a large amount.” 

If you do remove the excess cash, be aware there’s a time limit.

“You generally have to withdraw the funds in the year you overcontributed or the following year,” Ball explains. “It will be a regular RRSP withdrawal. So the CRA would charge you withholding tax when you take the funds out. You’ll be out the tax until you file your return. Although it is possible to ask the CRA to waive these withholdings through a T3012a form.” 

At tax time, you’ll receive a T4RSP slip. You will also fill out a T746 form. On the form you “lay out how much the overcontribution was and the amount you’re taking out as a refund of it, effectively.”

In this scenario, the overcontribution and withdrawal cancel each other out. The government will then refund you any withholding tax.

Keeping your TFSA on track

The TFSA penalty works the same way as its RRSP counterpart, except there’s no $2,000 buffer. The government will charge you 1% monthly on your entire overcontribution.

It’s important to note that unused room carries forward with TFSAs, too. In practice this means you could set up your first TFSA in 2024 with up to $95,000. Just ensure you were at least 18 years old – the minimum age to open a TFSA – when the accounts were first established in 2009.

Bottom line? It pays to stay aware of the annual TFSA contribution limit (up to $7,000 for 2024). Unlike RRSPS, the TFSA limit is the same for everyone.

TFSA overcontributions: How they happen

Once you withdraw funds from any bank account, you can’t recontribute them until the following year. (Unless you have enough contribution room in the current year to do so.)

So, let’s say you’ve already contributed the maximum allowed for this year. You take out $7,000 to use for a trip. If you change your mind and put it back, you’ve overcontributed. But if you’ve only put in $3,000 this year? You can then put back up to $4,000 by year-end without penalty.

The steady accumulation of contribution room since 2009 may mitigate this risk.

“Overcontributing was a bigger issue when TFSAs first started. That’s because you only had a year or two of room,” says Ball. “So, let’s say you put in the full amount in year one or two. And then you made a withdrawal and put the cash back during the same year. That would be a problem.” 

Today, if you haven’t contributed the maximum every year, you may have some room to cushion you from penalties.

The other thing to watch for with TFSAs is moving the money around. Let’s say you withdraw your TFSA funds and open a new TFSA elsewhere. If you deposit the cash there, you could trigger a big overcontribution penalty. 

For example, let’s say you withdrew the TFSA maximum of $95,000 for 2024. You then recontributed it into a new TFSA. The entire amount would be penalized at 1% for each month you’ve overcontributed.

Remember, you don’t get the contribution room for that withdrawal back until the next calendar year. That means the entire deposit to your new TFSA would count as a fresh contribution in the current year. 

The safer way to move TFSA money? Have your current financial institution make a direct transfer for you.

How to fix a TFSA overcontribution

Withdrawing an excess contribution from your TFSA is easier. This is because unlike RRSPs, your money isn’t taxed when you take it out of your account. You simply remove the cash from your TFSA, halting the penalty in its tracks.

A final option: Appeal for clemency.

For both RRSPs and TFSAs, the CRA may cancel all or part of the penalty under certain conditions. You just need to provide an explanation of what happened in writing.

This article is meant to provide general information only. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.