What happens if I overcontribute to my RRSP or TFSA?

Being an overachiever can be an asset, but overcontributing to your registered investment accounts isn’t a way to get ahead.

The Registered Retirement Savings Plan (RRSP), Tax-Free Savings Account (TFSA) and Tax-Free First Home Savings Account (FHSA) were created with one goal in mind: encouraging saving and investing. To do that, these accounts come with tax advantages, but there are limits to how much tax relief the government is willing to provide.

For instance, these accounts cap how much you can contribute each year; going over the limit could trigger penalties and interest charges that can eat away at your savings. (Any unused room from one year is added to your contribution room the next, so there can be years in which you contribute more than the annual limit and don’t anger the taxman.)

What is an overcontribution?

An overcontribution occurs when you put more money into a registered account, such as an RRSP, TFSA or FHSA, than the allowable annual limit.

• RRSP: The annual limit for an RRSP is 18% of your earned income in the previous year. However, it can’t exceed the annual limit set by the Canada Revenue Agency (CRA), which is $30,780 for 2023. The limit includes your direct contributions and amounts paid from your employee pension plan.
• TFSA: The annual limit for a TFSA is set each year. Currently, the 2024 limit is set at $7,000, up from $6,500 in 2023. The annual limit is now indexed to inflation, meaning it will rise over time. It has fluctuated considerably over the years, from a low of $5,000 when the TFSA was launched in 2009 to a one-time high of $10,000 in 2015. If you were 18 when the TFSA launched and never contributed to the account, you could deposit up to $95,000 into the account as of 2024.
• FHSA: FHSAs cap contributions at $8,000 a year. Like the RRSP and TFSA, you can roll over unused contribution room to the following year. However, unlike the RRSP and TFSA, FHSA contribution room does not begin accumulating until an account is opened, and the account is subject to a lifetime contribution limit of $40,000. If a person meets the prerequisites for the program, it is in their best interest to open an FHSA as soon as possible.

What happens if I overcontribute?

There are penalties for overcontributing to registered accounts, which can add up over time.

RRSPs include a $2,000 overcontribution buffer on which you won’t be charged any penalties, but you also won’t get any tax deduction on that amount. Anything over that buffer will be subject to a penalty of 1% per month until you withdraw the excess dollars. The penalty needs to be paid within 90 days after the end of the calendar year. Failure to pay the penalty by the deadline could also result in a late filing penalty of 5% of the balance owing, which is also subject to a 1% fee on the balance for each month you’re late (up to a maximum of 12 months), as well as an interest penalty. The CRA calculates interest daily starting on day 91.

The penalties for overcontributing to the TFSA and FHSA are similar, but you don’t get the $2,000 buffer. You will pay a 1% penalty per month on the excess contribution amount. The penalty is calculated based on the highest excess amount during the month.

With an FHSA, as with a TFSA, an overcontribution occurs when you contribute more than your FHSA contribution room. You will be subject to a tax of 1% on the highest excess amount in the month, for each month (or part of a month) that you’re in an overcontribution position, until you make a withdrawal or until new contribution room is created in a subsequent calendar year. Upon the creation of new contribution room, the overcontribution can be deducted for the year in which the room was created (not the year it was contributed).

What do I do if I overcontribute?

Overcontributions happen, often by accident. With RRSPs, you might forget to consider the contribution from your employee pension plan. With a TFSA, it could happen if you have accounts with more than one financial institution, and you lose track of your contributions, or if you’ve withdrawn money and overcontributed when putting it back.

If you have made an overcontribution, the CRA will eventually notify you. But if you notice the error before it happens, withdraw the excess amounts as soon as possible, and check with the CRA to see if there are any penalties and if there are any other steps you need to take.

Will the CRA give me a break?

It’s possible to have the CRA waive any overcontribution penalty, under certain conditions. For instance, the CRA might make an exception if it deems the overcontribution was due to a “reasonable error,” and you have taken steps to fix the mistake and remove the overcontribution. You’ll need to fill out a few forms to make your case.

Ultimately, keeping track of your contributions is the best way to avoid penalties. You can do this by monitoring your CRA “My Account for Individuals” account, which indicates how much you can save in your various registered accounts. Pay special attention to the contribution limits for registered accounts, and be sure to review this information on your annual Notice of Assessment that comes after you’ve filed your taxes.

Contributing to registered accounts is a smart way to save for your future, but if you want to avoid penalties and the wrath of the CRA, it’s important to know your limits.