RRSP Over contribution | RRSPs and RRIFs | Discussion forum

I have heard about it and if you feel comfortable with it...do it. For CRA info see here.

When I retired (golden hand shake) I was able to put a huge chunk of severance into RRSP. See here So if you have severance in the near future you will find the latter helpful for RRSP and the last year of income tax with employment income.

It is of value early in one's RRSP contributing years since its income is compounding tax free over all those years. Then the idea is to make sure to eliminate it by undercontributing in one's last year of employment so that the $2000 can be recorded as a deductible contribution.

The over contribution doesn't mean much if there is only a few years of compounding but if one does it early in their 20s, there is decades of compounding (or stock market gains) there.

Loonie said

…I still have contribution room that I will never use.

Theoretically, I could still make those contributions, as I'm not in the mandatory RIF zone yet, but I have nothing to deduct them against, so they would be fully taxed at this end. If I were to do so, there is a form to fill out with CRA which enables you to get that money out again without paying the tax twice. This would apply to any contributions you made out of income which had been taxed already and for which you could not claim a deduction.
…

No need to fill out a special form in that case. Such unused (not previously deducted) RRSP contributions are not overcontributions. You have RRSP contribution room to potentially deduct them.

I found out earlier that the RRSP deductions for such contributions can be claimed anytime in the future, including in the mandatory RRIF zone to offset RRIF withdrawals.

It is a strategy to make RRSP contributions, up to any remaining RRSP contribution room, before one enters that mandatory RRIF zone.

Rick said

Read this on a CIBC 2016 CIBC Year End Tax Tips. It says you can over-contribute up to $2000 without penalty. Does anyone have any experience doing that? 2017 may be my last year with employment income so if I can stick a few extra bux into my RRSP, I may take advantage.

It may be beneficial to make a one-time
overcontribution to your RRSP in December before
conversion if you have earned income in 2016 that
will generate RRSP contribution room for 2017.
While you will pay a penalty tax of 1% on the
overcontribution (above the $2,000 permitted
overcontribution limit) for December 2016, new
RRSP room will open up on January 1, 2017 so the
penalty tax will cease in January 2017. You can
then choose to deduct the overcontributed amount
on your 2017 (or a future year’s) return.

Hi Rick...I was confused about the over-contribution exemption of $2000 in that I thought it was a "lifetime overcontribution" that I could still deduct. You can over-contribute up to $2000 each year in theory but you can't deduct that over-contribution. It remains in your line "B" total of your annual RRSP deduction limit statement attached to your Notice of Assessment (NoA) from Canada Revenue Agency (CRA), for you to deduct next year. If you choose not to deduct it next year, you can't over-contribute that $2000 again without paying the penalty, calculated per month at, I believe, 1% (like TFSAs).

I found that out when I miscalculated my expected RRSP contribution room, miscalculating the pension adjustment from two years prior and not last year's then had to wait till next year to deduct it. I similarly made a similar mistake when I accidentally over-contributed by $1, not taking into account whether CRA rounds up or rounds down to the nearest dollar.

So I guess the only benefit is that one year of extra tax-free growth, but come next year, you'll either have to keep that over-contribution or deduct it from your new year RRSP deduction limit. There's not really a huge advantage in the end, as I see it, especially since...in your case, your RRSP deduction limit isn't expected to continue much longer, thereby making it ineligible for deduction. My question: what happens when it comes time to draw down your RRSP or convert to a RRIF, does the lingering over-contribution get withdrawn, subject to taxation and, if so, then one never got the benefit of the tax deduction.

Hope that helps,
Doug

I read what I thought was some good advice a while back regarding whether/when to sell a stock. The advice was to ask yourself if you would buy that stock today. If the answer is "no", then you should sell it.
Countering that, the rejoinder from other part of my brain says, if it's not worth anything much anyway, what's the hurry?

Beware. There is no such thing as tax-free with RSPs. There is only tax-deferred. And you will pay at your highest marginal rate, regardless of anything, when you withdraw or your estate has to close out the funds. The only exception is for moneys that you contributed (and had room for) but did not claim as a deduction against income. For that, you can fill out an exemption form with CRA.
Norman's idea, that you could still take the deduction as long as you are not yet in the mandatory RIF zone, is valid, but only if you are certain that you will not end up paying more taxes later. The issue emerges when one partner in a couple dies and the other acquires the remaining RIFs of the deceased, which can bump up their income considerably. For those in the 65-70 age group, especially those who have chosen to defer OAS and/or CPP to age 70, some careful calculations would need to be made.

For many people, there is certainly a role for RSPs. However, they have been oversold, and many people do not appreciate the long term consequences when they buy into them. There was an assumption, when most of us bought them, that when we got old, our incomes would be lower and that we would be paying tax at a lower marginal rate. Many people have discovered, however, that their marginal rate is no better now, and sometimes even higher, with the added complication of clawbacks and disentitlements in old age. The kind of people who could afford RSPs in the first place often tend, not surprisingly, to be fairly comfortable in old age. The older you get, the less attractive it seems, as you are stuck with mandatory withdrawals and inflexible taxation. So, I'm with kanaka in dumping them as soon as prudently possible. In my view, they should simply be looked at as an income averaging system, and evaluated as such, which means you need to have a plan for exiting them when you buy them. When I realized that there would be no advantage to me in acquiring more of them, I just stopped buying them. And now I'm aggressively dumping what I have every December to make best use of my tax bracket. In retrospect, I think the best time to buy them is in your higher earning years, so as to get the best deal on the deduction, but, even then, you need to look at which tax bracket you'll be in in doing so. That second-tier level is very broad, and you could end up there both when depositing and withdrawing, even with significantly different incomes. Dividend income is better suited to older people anyway, so the advantage of RSPs fades as you age for several reasons. Following this logic, if you buy late and dump early, you may not be getting the long term investment advantage that is supposed to yield better returns. So, in the end, I am not impressed with RSP. A lot of things become more obvious as you get older and have to contend with them. Since I do like annuities, it is worth remembering that they are a MUCH better deal when purchased outside of RSP/RIF, tax-wise.
So, I'm scrambling to get those RSPs down as low as I can right now without incurring exorbitant taxes. It's a fine balance, and requires endless calculations and projections. I really think I'd have been better off if I'd not bought any. Others will no doubt feel differently, according to their circumstances and priorities.

It would be nice for beneficiaries if RSPs could be inherited like TFSAs, but not really fair. They are supposed to be a retirement vehicle, and on that basis huge deductions were allowed earlier in life. There is no real justification for passing this on to another generation.

That said, I think the tax hit should be limited so that it is not higher than it was when the deferral was first allowed. I think this is the real reason why the gov't never got rid of them, even while introducing TFSAs. I suspect they make too much money on those estates! And no government will probably ever be motivated to get rid of them for the same reason.

Loonie said

…
Beware. There is no such thing as tax-free with RSPs. There is only tax-deferred. And you will pay at your highest marginal rate, regardless of anything, when you withdraw or your estate has to close out the funds. …

That's not always the case. One needs to include the income tax savings from the RRSP deductions on the contributions. RRSP will be effectively tax-free when the average tax savings rate on the contributions is the same as the average tax rate on the RRSP and RRIF withdrawals.

It can still be worthwhile when the tax rate on the withdrawals is higher than the tax credit rate on the contributions should the growth in the RRSP be high enough.

In a previous post, I examined a situation where deductions for the contributions saved taxes at an average of 32½% and the withdrawals are taxed at an average of 40%.

With the growth of $400,000 of contributions to $1.3 million, one ends up paying 16.05% in taxes on the gain of $900,000. That less than half of the up to 32½% the person would have paid in taxes had the money been invested outside an RRSP.

Sure, it is not tax free. But, the person ends up paying about the same as if the $900,000 in growth was all capital gains.

It is challenging to financially plan over a period that spans decades. Lots of things cannot be fully anticipated. I think the best that can be done is to plan/predict and update every five years or so.

The $400K to $1.3 million scenario does scale. So, the results still hold for a more modest $40K of contributions to $130K. The results also hold when $130K are the withdrawals over time.

$40K of contributions to $130K of withdrawals is not so far fetched. $1,600 per year of RRSP contributions over 25 years, with 6% per annum return, will end up being $87,783. With subsequent 4% per annum return, that will be enough for 21 annual withdrawals of $6,200 each, for a total of $130,200 of withdrawals.

I think the point the Heinzl and I are trying to make is that the 40% tax on the RRSP/RIF withdrawals is gross and does not account for the benefit of 32½% tax refund from RRSP deductions years before.

With 32½% tax refund from the RRSP deductions, the annuitant likely had a marginal tax rate around 32½% too. Had the investments been made outside an RRSP, the investment income would have been taxed at 32½% and capital gains would have been taxed at 16¼%.

With the RRSP, all the income, capital gains, and dividends end up taxed at 16.05%.

I agree the RRSP's won't work this way for everyone. Those who qualify for both GIS and OAS in retirement (under $17K to $22K per year) would face a 50% GIS clawback from RRSP/RRIF withdrawals. The investment return would have to quite high to overcome that if the annuitant was in the 25% tax bracket when the RRSP contributions were deducted.

It is also possible the returns achieved be too low to overcome a higher tax rate on withdrawals.

One will need to do the calculations to see. A higher tax rate on the RRSP/RRIF withdrawals and annuity payments alone does not mean there was no advantage in using an RRSP.

Agrreed, Bill. I'm going to try to work out the optimum tax situation annually, at least for the foreseeable future, but the temptation to make the problem go away sooner is definitely there - problem is that it also makes the money go away! I have read some commentators suggesting doing this.
We are actually being punished for saving money when you consider the clawbacks and disentitlements.

The necessary calculations are a royal PI'TA. You can never be sure you've got it right.. And things continue to change.

There are a couple of considerations that are making me unlikely to cash it all in. One is that there may come a year or two with extraordinary medical expenses which will offset the tax hit. Second is that inflation will reduce the hit to some extent as tax brackets and other barriers creep up, and will be more useful the longer we live. Third, no rush until at least 72 years. The optimum time for doing so might be in the year after one of us dies, as the hit then will increase significantly all at once. On the other hand, it could be better to do it while both are living, as the hit will be less on each one individually - if one if ready to make that decision at the time

All of this brings me back to my previous conclusion that RSPs are a PITA. There is no ideal way to dissolve them.

In retrospect, I would definitely say that putting the money into a nicer principal residence early in life plus TFSAs in the applicable years is by far a better deal in the long run.

HermanH said
I was speaking with a CRA agent specializing in the RRSP and found out that I can over-contribute $2000 without penalty.

Has anyone else heard about this allowance/grace?  

HermanH said
I was speaking with a CRA agent specializing in the RRSP and found out that I can over-contribute $2000 without penalty.

Has anyone else heard about this allowance/grace?  

Years back I had a greasy mutual fund salesman always have me over contribute by $2000 saying it’s within the rules to do so and never had an issue
The thought process was $2000 invested growing tax free over a 40 yr working career was going to be very beneficial. It would have been except for the fact after 10yrs invested I had no gain..hahahaa.. but there was no issue with the over contribution, ever