Should I over-contribute to my group RRSP?

Q. My employer has a fantastic group Registered Retirement Savings Plan (RRSP). They match employee contribution is up to 4%, of earnings, and they also provide a year-end bonus of 5% of earnings if you contribute the full 4%. Needless to say, I have taken advantage of this and been able to max out my RRSP contribution room.

However, I was on maternity leave for most of 2016. I still contributed to my RRSP with little income and now have almost no RRSP room.  So, do I reduce my contributions to account for my limited RRSP contribution room? Or do I keep up the full 4% to get the benefit of the employer’s 4% and 5% contribution and just pay the penalty of over-contributing this year? Even when you factor in the $2,000 wiggle room, I will be about $3,500 over.

— Thanks, Shelagh S.

A. Keep contributing. Sell a kidney to keep contributing to the max. First, the match your generous employer is offering up will likely exceed the CRA penalty by a wide margin. I don’t know what your income is, but let’s say that the 5% match is worth $3,000 to you. That is a big number. The penalty you’ll face on $3,500 is 1% per month or $420 over the course of the year. That is not such a big number.

The second reason why I think you should continue to contribute is that you may not actually have to pay the penalty. And I don’t mean that you just hope you don’t get caught. The onus is on you to report it and the Canada Revenue Agency (CRA) doesn’t take ignorance as a particularly valid excuse. But you can withdraw the over-contribution, and likely not have to pay withholding taxes.

If for instance, it were a $3,500 regular RRSP withdrawal, 10% would be withheld. But that shouldn’t happen with an over-contribution if you file the right forms with CRA. You can sort out the details with your financial institution, or by calling CRA directly. Do it before the tax season and you won’t even have to wait on the phone on hold.

Bruce Sellery is a frequent guest on financial television shows and author of Moolala

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About Bruce Sellery

Bruce Sellery is the CEO of Credit Canada, the country’s longest-standing non-profit credit counselling agency. He is a former MoneySense columnist.