RRSP over-contribution: 1% monthly penalty and how to withdraw the excess

Put too much in your RRSP and CRA charges you 1% per month on the overage. Not 1% annually - monthly. That's roughly 12.7% per year, compounding.

The penalty starts the month after you go over your limit and continues until you withdraw the excess or earn new contribution room. There's no grace period, no minimum threshold. Over-contribute by $50 and you're paying $0.50 every month until it's fixed.

Most over-contributions happen the same way: you contribute based on last year's room without accounting for this year's earned income, or you miss that some employer pension contributions reduce your RRSP limit.

How the penalty works

Say your 2024 RRSP limit was $25,000 and you contributed $27,000 in February. You're over by $2,000. CRA charges 1% monthly on that $2,000 - that's $20 per month starting in March.

If you don't fix it, you'll pay $20 in March, $20 in April, $20 in May, and so on. The penalty doesn't reduce the over-contribution. It's a separate tax on top of whatever you've already paid.

The penalty appears on Form T1-OVP, which you'll need to file for every year you have an over-contribution. Miss filing this form and you get hit with additional late-filing penalties.

How to fix an over-contribution

You need to withdraw the excess from your RRSP. This isn't a regular withdrawal - it's called an "excess contribution withdrawal" and it gets special tax treatment.

Contact your RRSP provider and tell them you need to withdraw an over-contribution. They'll ask for the amount and will process it as a non-taxable withdrawal. You won't get a T4RSP slip for this withdrawal, and you won't pay income tax on it since you never got the deduction in the first place.

The catch: you can only withdraw the exact amount of the over-contribution. If you're over by $2,000, you can withdraw $2,000 - not $2,500 to be safe. Withdraw too much and that extra amount becomes a regular taxable withdrawal.

When the penalty stops

The 1% monthly penalty stops the month after you withdraw the over-contribution. So if you withdraw the excess in June, your last penalty payment covers June - you don't owe anything for July onward.

New RRSP contribution room also reduces over-contributions automatically. If you're over by $2,000 in December and earn $15,000 next year, you'll have $2,700 in new RRSP room (18% of $15,000). That wipes out your over-contribution without needing to withdraw anything.

But waiting for new contribution room means paying the 1% penalty every month until then. At TaxSplit.ca you can see your current year's limit and avoid the over-contribution in the first place.

The $2,000 buffer myth

Some people think there's a $2,000 over-contribution buffer where CRA won't charge penalties. This isn't true. The $2,000 only applies to cumulative net past service pension adjustments - a very specific calculation that most people never encounter.

For regular RRSP contributions, there's no buffer. Go over by any amount and the 1% monthly penalty applies immediately.

Prevention

Your annual RRSP limit appears on your Notice of Assessment from last year's tax return. But that number can change if you have a company pension or if CRA makes adjustments to your earned income.

If you're close to your limit, contribute conservatively and wait for your NOA to confirm the exact room available. The penalty for over-contributing is steep enough that it's worth being cautious.

Fix an over-contribution fast. Every month you wait costs you 1% of the excess amount - money that won't earn anything back in your RRSP or anywhere else.