[Fall 2024 GPS] RRSP Over-Contribution at or past age 71

Your RRSP must mature by December 31 of the year you turn 71 meaning funds must be moved from RRSP to a RRIF or used to buy an annuity by December 31 of the year you turn 71. Your RRSP contributions will stop after this date, however there are strategies to make use of your RRSP in the final year before it matures. Two common strategies are: a) contributing past age 71 to a spousal RSP of your younger spouse and b) over-contributing to your own RSP before December 31 of the year you turn 71. We will discuss the latter below.

RRSP contribution room is based on last year's income. If you are still working at 71, your earned income will increase your RRSP contribution room for the following calendar year, but you can’t contribute to your own RRSP any longer. Instead, you can over-contribute to your RRSP in the year you turn 71. Overcontributing your RRSP before converting it to a RRIF will result in a minor penalty, but you will also achieve a substantial deduction and tax deferral.

To use this strategy, contribute in December before the RRSP closes. Assuming that the current year's RRSP capacity is maxed out, any amount over $2,000 above your RRSP room will incur a penalty of 1% per month. On January 1 of the following year, the new RRSP contribution room you gain will eliminate the over-contribution. You can deduct the income next year or carry it forward. Here's an example to illustrate:

John Smith is turning 71 in 2024, and he has T4 income of $180,000 with an average tax rate of 48.29% in Ontario. His income in 2024 will create RSP deduction room of $180,000 x 18% = $32,400 for 2025.

If John contributes this amount to his RSP in December 2024, the tax savings will be $32,400 x 48.29% = $14,758. There is a 1% penalty for over-contribution of [$32,400 - $2,000] x 1% = $304.

So, the total tax savings of this strategy is $14,454.