# Who uses their RRSP over contribution cushion



## none (Jan 15, 2013)

Does anyone here intentially make use of the $2000 RRSP over contribution cushion?

If one's careful (and it doesn't seem hard) it looks like a totally legit way to tax shelter more cash.

Basically, assuming zero RRSP contributions from Jan -April - look at your notice of assessment for your RRSP room when you get it then put that amount plus $2000 into your RRSP and you're good right?

sure, you can't claim it as a tax deferment until you actually have the room but if you're out of TFSA and RRSP room already it seems like a good idea to me.

Am I missing something?


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## RBull (Jan 20, 2013)

It's not $2K per year. Yes i used it many years ago.


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## none (Jan 15, 2013)

I know it's an absolute $2000 upper limit - so is this common practice? You're always $2000 over contributed to your RRSP? Like I said, it sounds like a good idea...


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## Eclectic12 (Oct 20, 2010)

I used it one year and that's it.

I have no idea of how common it is but I've read articles touting that everyone with an RRSP should do this.



Cheers


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## gardner (Feb 13, 2014)

The way I understand it, you could remain at 2K over your theoretical limit in perpetuity. But you don't get any tax credit on that money, and when you do take it out it becomes taxed income, so there seems little point. I think the 2K is designed to be a safety buffer to allow papering over of simple rounding errors without creating expensive compliance proceedings.


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## none (Jan 15, 2013)

I've read that you just need to be VERY careful about it but really - it seems like pretty simple math to me.


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## JordoR (Aug 20, 2013)

I would imagine if it happens once in awhile... not a big deal, but I would be hesitant to use it every single year without worrying about raising flags.
However, define "once in awhile", I'm not aware of any set rules.


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## Eclectic12 (Oct 20, 2010)

gardner said:


> The way I understand it, you could remain at 2K over your theoretical limit in perpetuity.
> But you don't get any tax credit on that money, and when you do take it out it becomes taxed income, so there seems little point.


Assuming one has no TFSA room left, one is delaying the tax credit ... so there is a cost to this. 
On the other hand, any growth is tax deferred - so any gains will be a future tax liability.

As to whether there is any point ... that's a personal situation depending on several variables as well as assumptions.




gardner said:


> ... I think the 2K is designed to be a safety buffer to allow papering over of simple rounding errors without creating expensive compliance proceedings.


+1 ... though I seem to recall reading it used to be larger ($8K comes to mind) until the gov't decided to reduce like it, likely from those using it year after year instead of on a "one of" basis.


Cheers


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## oob (Apr 4, 2011)

It seems like if you don't get the deduction it's actually negative value... yes growth is tax-deferred but you'd be paying tax on the withdrawal at your marginal income tax rate vs. capital gains rate. 

If you took that 2k and put it in an index fund in an unregistered account, you'd be deferring tax on gains until you sell without negative tax arb'ing yourself.


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## rikk (May 28, 2012)

I always did ... and it's useful to be aware of, should say that exceptional value investment present itself, assuming an investment RSP.


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## none (Jan 15, 2013)

Yeah, I'm totally doing this. My TFSA is stuffed.

Just to be clear. I just logged onto CRA and I have 20K in unused contribution room. I have put zero cash into my RRSP in the last year.

So.. I can put in 22K and but I am limited in claiming up to 20K on my taxes to get my tax deferment correct? That's should be all cool right?

because my income was so low last year I'm actually not going to claim any this tax season but waiting for next year where I may not end up claiming it all anyway. 

Thanks for the advice!


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## newuser (Sep 16, 2014)

none said:


> Yeah, I'm totally doing this. My TFSA is stuffed.
> 
> Just to be clear. I just logged onto CRA and I have 20K in unused contribution room. I have put zero cash into my RRSP in the last year.
> 
> ...


That was 2014 unused room. Don't forget you get 2015 room now too. If you've got the cash, you can contribute much more.


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## none (Jan 15, 2013)

That's making a lot of assumptions and this is a risky strategy so one has to be careful.

I made ~ 11K last year with a job that has a pension. The additional RRSP room that would result will be minimal. It's best to not ride the line too closely as the penalties for contributing over the $2000 buffer are pretty horrendous.

I would only do this at notice of assessment time to make sure that I don't go over.


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## Guban (Jul 5, 2011)

oob said:


> It seems like if you don't get the deduction it's actually negative value... yes growth is tax-deferred but you'd be paying tax on the withdrawal at your marginal income tax rate vs. capital gains rate.
> 
> If you took that 2k and put it in an index fund in an unregistered account, you'd be deferring tax on gains until you sell without negative tax arb'ing yourself.


Hopefully you won't use the overcontribution that way! Gardner said the same thing, but that's not the way to use the overcontribution! You *will* take the deduction at some point in time, but meanwhile, the money is growing tax deferred. 

The choice comes down to investing in a non-registered account, and pay taxes yearly, or have those taxes deferred inside of an RRSP. In this situation, it is better to defer taxes on the $2,000 investment.

As Eclectic points out, and I have many times over, this should only be done if your TFSA is maxed out.


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## OptsyEagle (Nov 29, 2009)

A little history here is in order.

Once upon a time, long, long ago, every Canadian was allowed $8,000 of over contribution room. Since $8,000 was a worthwhile amount of money, that could generate a reasonable commission, every financial advisor was taught, before they were even given a license, to sell a customer $8,000 more RSPs, then they were even allowed to contribute. They were given big colourful charts and pounds of back up data to convince these Canadians of the overwhelming merits of utilizing such a strategy.

This became so prevalent, that eventually the big bad taxman in the kingdom, saw what these Canadians were doing and said "wait a minute, the over-contribution was to address the issue of small errors, not to be used as a retirement strategy in itself". An so the big bad taxman waived his sceptre and sayeth, "from now on and for every more, Canadian's will only get $2,000 of over-contribution room..._and don't do it again_".

Since $2,000 is hardly worth the effort, since it generates very little commission for the financial advisors, and many Canadians did get themselves into trouble using up the $8,000 over-contribution amount, the issue was finally put to rest, and very rarely was ever heard of again ... and they all lived happily ever after, yada, yada, yada.

Anyway, in my opinion, $2,000 more in RSPs is not going to change your standard of living very much and it does come in handy when small errors are made. The only time I tend to ever use any of it, is perhaps to round up a contribution. For example, if I can put $9,962 in my RRSP, I might contribute $10,000.


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## none (Jan 15, 2013)

OptsyEagle said:


> Anyway, in my opinion, $2,000 more in RSPs is not going to change your standard of living very much and it does come in handy when small errors are made. The only time I tend to ever use any of it, is perhaps to round up a contribution. For example, if I can put $9,962 in my RRSP, I might contribute $10,000.


You know, this is really good advice. The push to hyper-optimize investing can get out of hand (eg add a lot of complexity to save fractions of percent on MER). I see your point especially with this room being for Canadian investments. Maybe it's not worth the hassle. It would be nice to avoid some bookkeeping though....

Thanks.


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## Eclectic12 (Oct 20, 2010)

oob said:


> It seems like if you don't get the deduction it's actually negative value... yes growth is tax-deferred but you'd be paying tax on the withdrawal ...


My understanding is that the deduction will be taken the following year so there's only a short time (compared to thirty years to the withdrawal) where the negative situation will exist.




oob said:


> ... at your marginal income tax rate vs. capital gains rate.


 ... and where the withdrawal at retirement is three or four marginal tax rates lower, do you see this as an issue?

Then too, where the RRSP owner is like my parents and uses the $2K for GICs/HISA, there may be minimal difference in the taxes.




oob said:


> ... If you took that 2k and put it in an index fund in an unregistered account, you'd be deferring tax on gains until you sell without negative tax arb'ing yourself.


Two things to ponder ... the first is that the popular index funds/ETFs that I am aware of are also paying cash distributions of mixed income. The same investment in the RRSP is going to keep the full $ until withdrawal whereas in a taxable account, it will add to the tax bill, in addition to any capital gains.

The second is that as the $2K is aimed at making an RRSP contribution a year later ... it is really wise to go with equity risk for such a short time frame? One might end up having to come up with more cash to get back to the $2K.


Cheers


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## Eclectic12 (Oct 20, 2010)

none said:


> You know, this is really good advice... Maybe it's not worth the hassle.


+1 ... 




none said:


> ... It would be nice to avoid some bookkeeping though....


You will have explain this too me ... using the $2K over-contribution avoids what bookkeeping?
I've have thought it would add slightly to it.


Cheers


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## gardner (Feb 13, 2014)

Eclectic12 said:


> My understanding is that the deduction will be taken the following year


Not really. The following year you put the full amount, so that you remain 2K over. If you stay 2K over through the 40 year contribution phase of your RRSP, and only take the deduction in the last year, by undershooting your full amount by the 2K, then you have optimally used the 2K extra. 2K @ 5% for 40 years is something like 11k. This is how I believe folks play the over contribution game.


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## none (Jan 15, 2013)

Eclectic12 said:


> You will have explain this too me ... using the $2K over-contribution avoids what bookkeeping?
> I've have thought it would add slightly to it.
> Cheers


Well there's no math in the RRSP account. For this all you need to do is after your max RRSP contribution (you get from your notice of assessment) add 2K and just don't add any more into your RRSP that year. Easy. Anyway, as soon as you accumulate an additional 2K of RRSP room each year it gets counted as a tax deferable RRSP contribution and you can do it all over again. Again, this makes no sense whatsoever if you have any TFSA room. I don't. i don't own a house and I'm a Sihk (Single-Income-Half-Kid).

As for math: For non-reg account you need to update cost averages as you buy/sell and all that. That, not a huge deal either. but Tax sheltered is always better.

Seems to make sense for me and quite easy of you just base it on the notice of assessment values.


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## Rysto (Nov 22, 2010)

You do not get $2K per year. You get $2K over your lifetime. Say your contribution limit is 18K. If you were to contribute $20K, you would not owe a penalty. If you earn an additional $18K of contribution room the next year, you can only contribute 18K without penalty. If you overcontribute by a further $2K then you will owe a penalty tax on the overcontribution of 10% per month. I'm much happier having the $2K cushion (I have managed to overcontribute to registered accounts twice in my life, and it's a pain to deal with) than with the tiny tax savings you'd get on $2K over the course of your life.


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## none (Jan 15, 2013)

Of course - it's only keeping track of a 2. I don't see why it's a big deal. 

If you do it at notice of assessment time all you do is just put in your unused contribution room (which I assume is new room - over contribution from last year) + 2K.

Easy. Right?


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## uptoolate (Oct 9, 2011)

I used it years ago. All of my children have used it. 2k over 50 years at 7% is 54k, at 8% is 93k and at 10% is 234k. Granted that is in 2064 dollars but even the 9% return with 3% inflation would be 37k in today's dollars. If they lived to 85, 9% with 3% inflation would be 105k in today's dollars. Kids are 100% equity.

Thanks for the story OptsyEagle. I didn't know that it used to be 8k. Those were probably the days when the annual RRSP amount was use it or lose it, not carried forward. 

Agree that you don't want to do this if you haven't maxed TFSA.


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## none (Jan 15, 2013)

This is a really interesting idea. So I could put in $2000 to my 4 year old RRSP and it would be an allowable over contribution.

As you say in 60 years it'll be worth about 100K - meaning my kid could retire a year early. That sounds like quite a gift actually.... I'll have to think about it (and discuss it with my accountant!)

CLEVER!


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## stanimal (Aug 20, 2013)

none said:


> This is a really interesting idea. So I could put in $2000 to my 4 year old RRSP and it would be an allowable over contribution.
> 
> As you say in 60 years it'll be worth about 100K - meaning my kid could retire a year early. That sounds like quite a gift actually.... I'll have to think about it (and discuss it with my accountant!)
> 
> CLEVER!


Keep in mind though, that you would likely be better off financially by investing the $2000 in a non-registered account (or TFSA if you have room), especially if expect that most of the gains to be capital gains and/or dividends. This is b/c you lose the tax preferential treatment for capital gains and dividends, since all amounts withdrawn from an RRSP are treated as income.


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## Guban (Jul 5, 2011)

stanimal said:


> Keep in mind though, that you would likely be better off financially by investing the $2000 in a non-registered account (or TFSA if you have room), especially if expect that most of the gains to be capital gains and/or dividends. This is b/c you lose the tax preferential treatment for capital gains and dividends, since all amounts withdrawn from an RRSP are treated as income.


Not sure about this.

http://www.michaeljamesonmoney.com/2014/03/debunking-rrsp-myths-with-pictures.html


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## uptoolate (Oct 9, 2011)

TFSA beats the overcontribution if you have the room. Remember that you would only do this if your TFSA and RRSP were already maxed. In the illustration that Guban posted above, the RRSP wins easily because of the tax refund. Without the tax refund, it isn't as clear but the tax drag is still there continuously on dividends and when capital gains are realized in a taxable account. If one was relatively low income then the taxable account might win but this isn't the scenario most people considering this would be in. If you are low income, there is probably no point in contributing to an RRSP now that the TFSA is available (assuming rules stay the same). Another benefit to putting the money in an RRSP versus TFSA or taxable is that it is perceived to be less accessible and therefore less likely to be withdrawn on a whim. The benefit of tax deferred growth should never be underestimated.


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## OptsyEagle (Nov 29, 2009)

Also to keep in mind is the fact that a minor (under 18) is not allowed to open up any form of investment account. So they are pretty much restricted to bank deposit accounts, with this strategy. So now you need to go back and redo your calculations for growth using bank interest. If you want to use 50 years, perhaps today's rate of 1-2% will turn out to be too conservative for the average rate of return, but it probably will not be 7%, 8% or 10% either. I doubt your children will be working a full year less with this strategy, especially since most will probably spend it on the $100,000 they will need for the minimum down payment on buying their starter home.


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## stanimal (Aug 20, 2013)

Guban said:


> Not sure about this.
> 
> http://www.michaeljamesonmoney.com/2014/03/debunking-rrsp-myths-with-pictures.html


I'm referring to the specific situation we are discussing here where you intentionally over contribute $2000 and will not receive any tax deductions in return, not a regular RRSP contribution.


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## stanimal (Aug 20, 2013)

uptoolate said:


> TFSA beats the overcontribution if you have the room. Remember that you would only do this if your TFSA and RRSP were already maxed. In the illustration that Guban posted above, the RRSP wins easily because of the tax refund. Without the tax refund, it isn't as clear but the tax drag is still there continuously on dividends and when capital gains are realized in a taxable account. If one was relatively low income then the taxable account might win but this isn't the scenario most people considering this would be in. If you are low income, there is probably no point in contributing to an RRSP now that the TFSA is available (assuming rules stay the same). Another benefit to putting the money in an RRSP versus TFSA or taxable is that it is perceived to be less accessible and therefore less likely to be withdrawn on a whim. The benefit of tax deferred growth should never be underestimated.


Great point. You do have to consider how frequently you would be realizing capital gains and your marginal tax rates throughout to do a proper comparison.

I was thinking of the (simplistic) case where you buy and hold and don't don't sell until you withdraw from your RRSP.


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## My Own Advisor (Sep 24, 2012)

Interesting idea about the over-contribution....and letting the (extra) money grow tax-deferred. It would make sense to take advantage of this buffer sooner than later. Never gave it much thought really.


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## none (Jan 15, 2013)

Yeah, it's not something that I plan to do until I check with my accountant which can wait a couple months. I have about 24K in unused RRSP claims (and TFSA is maxed) so it's not like my RRSP is sitting empty. It's more that it's not really worth the hassle if it brings up red flags with CRA - those guys can be jerks.


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## My Own Advisor (Sep 24, 2012)

Good point about flags on the plays!


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## uptoolate (Oct 9, 2011)

My assumption is buy and hold in the RRSP but of course the benefit in the RRSP is that you could do whatever you want and not trigger capital gains. Obviously the more you are prone to this, the more the RRSP beats having it in a taxable account. 

As OptsyEagle points out, a minor can have an RRSP but is limited to holding GIC type investments so it doesn't really make much of a difference there but as soon as they are 18 they can have a brokerage account and do whatever they want so a 7-10% return is not remarkable. 18+50 is only 68 so still a few years before one has to RRIF and if you consider that the money could be the last out, you could easily use 60 or 70 years of tax deferred growth. Too bad it only starts as 2k and not the original 8k that OptsyEagle mentioned.


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## Guban (Jul 5, 2011)

none said:


> This is a really interesting idea. So I could put in $2000 to my 4 year old RRSP and it would be an allowable over contribution.
> 
> As you say in 60 years it'll be worth about 100K - meaning my kid could retire a year early. That sounds like quite a gift actually.... I'll have to think about it (and discuss it with my accountant!)
> 
> CLEVER!


Please don't do this. A minor does not have this $2k buffer. You have to be 18 to get this room.

http://financialplanners.tdwaterhou...iles/b1993b55-6092-4714-b3a0-d08b8fd0aba4.pdf


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## uptoolate (Oct 9, 2011)

Ah that is great info Guban. I didn't know that. I didn't bother opening RRSPs for my kids until they were 18 as there wasn't much point given that they were only allowed to hold GICs and the like. So when they turned 18 they got the RRSP account and put in what they had allowable + almost 2k. For minors, one is allowed to have an 'In trust for' account with a brokerage firm and invest in the standard things. These are not formal trusts and there is no cost to set them up so it made more sense to have access to the full range of asset choices and then move to RRSPs once they were 18. I suppose that if we hadn't been in such a low interest environment that I might have opened the RRSPs sooner.


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## Money4life (May 17, 2012)

none said:


> You know, this is really good advice. The push to hyper-optimize investing can get out of hand (eg add a lot of complexity to save fractions of percent on MER). *I see your point especially with this room being for Canadian investments.* Maybe it's not worth the hassle. It would be nice to avoid some bookkeeping though....
> 
> Thanks.


This is a good thread as I'm thinking about doing this myself this year but I have a question regarding the area above that I've bolded. I assume I am reading too much into this but if I over-contributed by $2000, wouldn't it still be tax exempt money even if I had invested in International funds (CDN$) within my RSP? 

Also, this year, let's say that I contributed my 2015 deduction limit plus $2000 and when I file my taxes next year for tax year 2015, if I deducted my full deduction limit, wouldn't I just have this $2000 indefinitely "stored" in my RSP if I kept contributing my deduction limit in future years? In other words, I wouldn't have to deduct this $2000 the following year--it's my choice in when I would like to deduct that amount and it wouldn't affect my deduction limit if I just left that amount alone. Is this all correct? I am not planning to do any withdrawals soon as I have a long way to go before retirement.

Thank you.


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## OnlyMyOpinion (Sep 1, 2013)

Yes, not sure what was being referred to, once in your RSP your contribution can be in 'anything'.
My inclination however would be to stick with the rules rather than 'driving along the edge'. As noted, the extra $2k is not likely to change your way of life in retirement. If you do overcontribute you can expect the following on your NOA:

_You may have to pay a tax of 1% per month on your RRSP/PRPP excess contributions as your unused RRSP/PRPP contributions (amount B) exceed your RRSP/PRPP deduction limit for 2014 (amount A), as noted on "Your 2014 RRSP/PRPP Deduction Limit Statement" included with this notice. For more information, refer to "Tax on RRSP/PRPP excess contributions" in chapter 2 of the Guide T4040, RRSPs and Other Registered Plans for Retirement."_


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## Money4life (May 17, 2012)

OnlyMyOpinion said:


> Yes, not sure what was being referred to, once in your RSP your contribution can be in 'anything'.
> My inclination however would be to stick with the rules rather than 'driving along the edge'. As noted, the extra $2k is not likely to change your way of life in retirement. If you do overcontribute you can expect the following on your NOA:
> 
> _You may have to pay a tax of 1% per month on your RRSP/PRPP excess contributions as your unused RRSP/PRPP contributions (amount B) exceed your RRSP/PRPP deduction limit for 2014 (amount A), as noted on "Your 2014 RRSP/PRPP Deduction Limit Statement" included with this notice. For more information, refer to "Tax on RRSP/PRPP excess contributions" in chapter 2 of the Guide T4040, RRSPs and Other Registered Plans for Retirement."_


Sound advice; though I'm not sure when my unused contributions would ever exceed my deduction limit--perhaps if I lost my job and couldn't find another placement of work.


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