RRSP Overcontribution $2,000 Cushion — Use the Tolerance Carefully Without Triggering the 1% Penalty
What Is It?
CRA generally allows a $2,000 RRSP excess-contribution cushion before the 1% monthly tax on excess RRSP contributions applies. This does not make the extra amount deductible right away, but it can prevent immediate penalty tax if you stay within the limit.
What Most People Don’t Know
- The cushion is about avoiding the 1% penalty, not creating extra deduction room.
- You generally need to be at least 18 to benefit from it.
- Once you exceed the cushion, the 1% monthly tax can apply quickly.
Frequently Asked Questions
Does the $2,000 cushion mean I can deduct an extra $2,000?
A: No. It generally means you can avoid the 1% monthly tax on excess contributions up to that amount, but it does not create extra deduction room.
When does the 1% monthly tax start?
A: CRA says it generally applies to unused contributions that exceed your RRSP deduction limit by more than $2,000.