Your current year’s RRSP contribution limit is 18% of your previous year’s earned income, to a maximum of $26,500 (2019) plus any unused contribution room carried forward from previous years.
There’s some confusion around the RRSP over contribution limit and RRSP carry forward rules. This post explains both of these rules.
RRSP Over Contribution Limit
You are allowed to over contribute a cumulative lifetime total of $2,000 to your RRSP without incurring a penalty tax. An RRSP over contribution is not deductible from your current year’s income, but the advantage is that you can add extra cash into your RRSP, where it can grow on a tax-deferred basis.
RRSP over contributions can be deducted in a subsequent year when your actual RRSP contribution is less than the maximum allowed.
A penalty tax of 1% per month applies to the amount of an RRSP over contribution exceeding $2,000. If you think you may have over contributed to your RRSP, contact an accountant to determine the steps you need to take.
The calculation of the penalty tax and filing of forms to withdraw the excess amount is not part of the normal personal tax return process.
An RRSP over contribution can be an effective tax strategy; however you are usually better off paying down non tax deductible debt first, like your credit card or mortgage. If you decide to over contribute to your RRSP, work with your accountant or financial advisor to ensure you stay within the allowable limit.
One of the reasons the government allows an RRSP over contribution is to provide you with a cushion against possible errors and unforeseen events, like a pension adjustment (PA).
Consider using your $2,000 RRSP over contribution when you quit working. The earned income you have in your final year of employment will entitle you to an RRSP deduction in the following year.
RRSP Carry Forward Rules
For most Canadians, it’s not always possible to make a full RRSP contribution in any given year. If you don’t contribute the maximum allowable to your RRSP in any year, you can carry the unused portion forward indefinitely.
This means that if you were eligible to contribute $10,000 each year from 2009 to 2019, but you only contributed $5,000 each year, you will be able to contribute an additional $50,000 over and above your annual maximum limit.
If you are expecting a change in your income in the near future that will bump you into a higher tax bracket, it might make sense to delay your RRSP contributions until then. In this case, it’s important to consider the loss of tax-sheltered investment growth by putting off your contributions.
To accumulate RRSP contribution room, you must file an income tax return. If you have earned income for RRSP purposes, but you are not required to file an income tax return, you should consider filing anyway. While an RRSP may not be a significant consideration at this point, there will likely be a time when you have enough cash to make a contribution and can benefit from the deduction.
If you had low taxable income in 2019 and enough cash to make an RRSP contribution, consider making the contribution before the RRSP deadline but don’t claim the deduction for 2019.
As long as the amount isn’t claimed as a deduction, your unused contribution room remains intact. You can still claim the deduction in a future year, preferably when your taxable income is higher. In the meantime, the investments inside your RRSP will grow on a tax-deferred basis.