If you’ve overcontributed to your Registered Retirement Savings Plan, it’s not the end of the world. Nicole Ewing, Director, Tax and Estate Planning, TD Wealth, joins Kim Parlee to talk about the penalty for overcontributing and how you can resolve this issue.
Print Transcript
* Today on Ask MoneyTalk, we answer a question we're hearing around RRSP contributions. Nicole Ewing is Director of Tax and Estate Planning at TD Wealth. She joins me now. Nicole, here's the question: Help! I have overcontributed to my RRSP. What do I do?
* Well, if you've done it today, you can get that money out today.
* Yeah.
* Generally speaking, if you take the money out within the same month, you're going to be safe. If you've passed over that one-month period, now we need to think about how to get that money out as quickly as possible. We can do that with withholding tax applying or without withholding tax applying. If we want withholding tax not to apply, though, that's going to be a process. There's forms to fill out we'll need to provide to the financial institution.
- Depending on what time of year it is, we might simply be waiting for the new contribution room to generate. So if we did this in December, come January, we have some new room. Maybe that's going to resolve the issue for us. Otherwise, we're going to be paying that penalty. And the penalty can be quite significant. We might have the opportunity to request in writing to have that penalty waived if we can show that this was a genuine error on our part-- it was not intentionally done-- and that we're doing everything we can to rectify that situation as quickly as possible.
* OK. So give me a little context, perhaps, on the things we need to think about to make sure that we don't do that. So because, what are the penalties? And what do you need to think about?
* Well, the penalties, again, we will be responsible for paying 1% tax per month for each overcontribution, for each dollar of overcontribution over a $2,000 buffer. So we have our contribution limit, if we do that, plus $2,000. Anything else over that, this is where we're going to get hit. We will also, once the government determines that we have had this overcontribution, we need to pay that back as quickly as possible.
- There's forms that need to be filed there as well. They need to be filed within that 90 days. We need to pay that back within 90 days. Otherwise, we're going to have a late filing penalty of 5% of the balance plus 1% each month. If we are a repeat offender, they essentially double. Those can get quite out of hand. So we want to be taking that money out as quickly as possible in the most efficient way that we can.
* All right. Don't do it. Why does it happen?
* Well, sometimes we're just not as mindful about what we've done, maybe, throughout the year. Other times, it can be things that we've just overlooked. So for example, if you are part of a group plan at work, and maybe we get those great matching contributions, those are going to count against your contribution limit. If you have other pension amounts that you are contributing to, those are also going to be counting against your limit. We may not have coordinated with our spouse. So we may have spousal contributions that we didn't factor into our own limit.
- So oftentimes, this can be really, essentially, inadvertence and overlooking. We just haven't looked at what our numbers are. And we don't have that full awareness of what all is included in counting against our contribution limit. And we don't do this as part of a planned strategy. So we can trip over ourselves a little bit.
* Yeah. And someone who can help not have you trip over yourself a little bit is work with somebody who's watching this.
* Oh, absolutely. This is where we want this to be part of a plan. So contributions should be made all year long if you have the opportunity to do that. Perhaps you're making them earlier in the year. You can use them against last year and this year. So we want to be working with an advisor who can look at our overall strategy, help us determine what the best approach to those contributions is going to be. And then we don't have to worry about these missteps.
* Nicole, thank you. That is Nicole Ewing, Director of Tax and Estate Planning at TD Wealth. And if you have a question, please send it in to moneytalk@TD.com.
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* Well, if you've done it today, you can get that money out today.
* Yeah.
* Generally speaking, if you take the money out within the same month, you're going to be safe. If you've passed over that one-month period, now we need to think about how to get that money out as quickly as possible. We can do that with withholding tax applying or without withholding tax applying. If we want withholding tax not to apply, though, that's going to be a process. There's forms to fill out we'll need to provide to the financial institution.
- Depending on what time of year it is, we might simply be waiting for the new contribution room to generate. So if we did this in December, come January, we have some new room. Maybe that's going to resolve the issue for us. Otherwise, we're going to be paying that penalty. And the penalty can be quite significant. We might have the opportunity to request in writing to have that penalty waived if we can show that this was a genuine error on our part-- it was not intentionally done-- and that we're doing everything we can to rectify that situation as quickly as possible.
* OK. So give me a little context, perhaps, on the things we need to think about to make sure that we don't do that. So because, what are the penalties? And what do you need to think about?
* Well, the penalties, again, we will be responsible for paying 1% tax per month for each overcontribution, for each dollar of overcontribution over a $2,000 buffer. So we have our contribution limit, if we do that, plus $2,000. Anything else over that, this is where we're going to get hit. We will also, once the government determines that we have had this overcontribution, we need to pay that back as quickly as possible.
- There's forms that need to be filed there as well. They need to be filed within that 90 days. We need to pay that back within 90 days. Otherwise, we're going to have a late filing penalty of 5% of the balance plus 1% each month. If we are a repeat offender, they essentially double. Those can get quite out of hand. So we want to be taking that money out as quickly as possible in the most efficient way that we can.
* All right. Don't do it. Why does it happen?
* Well, sometimes we're just not as mindful about what we've done, maybe, throughout the year. Other times, it can be things that we've just overlooked. So for example, if you are part of a group plan at work, and maybe we get those great matching contributions, those are going to count against your contribution limit. If you have other pension amounts that you are contributing to, those are also going to be counting against your limit. We may not have coordinated with our spouse. So we may have spousal contributions that we didn't factor into our own limit.
- So oftentimes, this can be really, essentially, inadvertence and overlooking. We just haven't looked at what our numbers are. And we don't have that full awareness of what all is included in counting against our contribution limit. And we don't do this as part of a planned strategy. So we can trip over ourselves a little bit.
* Yeah. And someone who can help not have you trip over yourself a little bit is work with somebody who's watching this.
* Oh, absolutely. This is where we want this to be part of a plan. So contributions should be made all year long if you have the opportunity to do that. Perhaps you're making them earlier in the year. You can use them against last year and this year. So we want to be working with an advisor who can look at our overall strategy, help us determine what the best approach to those contributions is going to be. And then we don't have to worry about these missteps.
* Nicole, thank you. That is Nicole Ewing, Director of Tax and Estate Planning at TD Wealth. And if you have a question, please send it in to moneytalk@TD.com.
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