Registered Retirement Savings Plans (RRSPs) remain a powerful tool for Canadians to build their retirement nest egg. Their primary appeal lies in tax deferral—you don’t pay tax on RRSP contributions until you withdraw the funds, ideally in retirement when your income is lower. But in today’s economy, retirement doesn’t always mean stopping work completely.
As more Canadians continue working part-time past age 65 due to rising living costs, this new retirement reality is creating unexpected risks within the RRSP system. The Canada Revenue Agency (CRA) has identified three major red flags that could result in higher taxes, penalties, or even disqualification of your RRSP if not properly managed.
Red Flag 1: Withdrawing RRSP Funds While Still Earning Income
If you’re still working—even part-time—and begin withdrawing from your RRSP, the CRA considers that withdrawal fully taxable income. This can push you into a higher tax bracket, leading to:
- Higher withholding taxes at the time of withdrawal
- Increased marginal tax rate, reducing your net income
- Lower returns on your long-term RRSP strategy
Postponing withdrawals until after you fully retire can significantly reduce your tax bill. The longer you delay tapping into your RRSP (within the legal limit), the more you benefit from tax-sheltered growth.
Red Flag 2: Over-Contributing to Your RRSP
Over-contributing—whether by accident or misunderstanding—can quickly lead to costly penalties. For 2025, CRA sets your maximum RRSP contribution as:
- 18% of your previous year’s earned income, up to a cap of $32,490
- A $2,000 lifetime buffer allows minor excesses without penalty
But if you exceed your limit beyond that $2,000 buffer, CRA charges a 1% penalty per month on the overage, which can add up rapidly. Common pitfalls include:
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- Misjudging your earned income
- Double-counting contributions made to a spousal RRSP
- Failing to update figures based on your latest Notice of Assessment
Always check your CRA My Account or latest tax documents to know your exact contribution room.
Red Flag 3: Holding Unauthorized Investments Inside an RRSP
While RRSPs are flexible, they are not a free-for-all investment account. CRA maintains strict rules about what assets qualify. Holding prohibited or non-qualified investments inside your RRSP can trigger penalties or even disqualify the plan entirely. Unauthorized investments include:
- Shares of private foreign companies not listed on public exchanges
- Direct real estate holdings (e.g., owning a rental property directly)
- Certain derivatives and other complex financial products
If you’re unsure about an investment, consult a financial advisor or review CRA’s qualified investments list before placing it inside your RRSP.
Summary of the 3 Major RRSP Red Flags
| CRA Red Flag | Risk/Consequence | Trigger |
|---|---|---|
| Withdrawing While Working | Higher tax bracket, reduced benefit | Drawing funds while still earning income |
| Over-Contribution | 1% monthly penalty on excess | Exceeding the annual limit beyond $2,000 buffer |
| Unauthorized Investments | Tax penalties, RRSP disqualification | Holding ineligible or prohibited assets inside RRSP |
Plan Withdrawals Wisely
- Avoid taking funds while still employed, if possible
- Delay withdrawals until full retirement to stay in a lower tax bracket
- Consider smaller, periodic withdrawals to minimize tax spikes
Monitor Contributions Closely
- Review your deduction limit annually via the CRA’s Notice of Assessment
- Remember that spousal RRSP contributions count toward your total limit
- Use the CRA’s My Account portal to track contributions in real-time
Invest Only in Approved Financial Products
- Stick with Canadian mutual funds, ETFs, stocks, and bonds
- Avoid unlisted, foreign, or private business shares
- Always verify eligibility if you’re unsure about a specific investment
Know the Withholding Tax Rates on RRSP Withdrawals
When you take money out of your RRSP, your financial institution must withhold tax immediately, based on the withdrawal amount:
| Withdrawal Amount | Federal Withholding Tax | Quebec Withholding Tax |
|---|---|---|
| Up to $5,000 | 10% | 19% |
| $5,001 – $15,000 | 20% | 24% |
| Over $15,000 | 30% | 29% |
It’s important to note that these are just withholding rates—your actual tax bill may be higher or lower, depending on your total income for the year. That’s why it’s crucial to plan ahead and budget for any potential tax balance due at tax time.
Protecting Your Retirement Nest Egg Starts with Awareness
Whether you’re retired or still earning some income, mismanaging your RRSP could lead to unintended penalties or higher tax bills. By being aware of these CRA red flags, you can take proactive steps to avoid problems:
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- Time your RRSP withdrawals carefully to stay in a favorable tax bracket
- Stay within contribution limits, including spousal contributions
- Avoid unqualified investments that could trigger tax issues
RRSPs can still be a cornerstone of a successful retirement plan, but only if used strategically. Smart planning, consistent monitoring, and professional advice can help you maximize your benefits and steer clear of common pitfalls.
FAQs About CRA RRSP Red Flags
Q1. Can withdrawing from my RRSP while still working increase my tax bill?
Yes. RRSP withdrawals are considered taxable income. If you’re still earning, the added income could push you into a higher tax bracket, resulting in higher taxes and reduced benefits.
Q2. What happens if I exceed my RRSP contribution limit by less than $2,000?
You won’t be penalized, but you also can’t claim a deduction for the excess. If you go beyond the $2,000 lifetime buffer, the CRA charges a 1% monthly penalty on the excess amount.
Q3. How can I check my exact RRSP contribution limit?
Log into your CRA My Account or refer to your latest Notice of Assessment. These sources provide your contribution room for the current year.
Q4. Are all investments allowed inside an RRSP?
No. The CRA only allows qualified investments. Unauthorized holdings—like private foreign shares, real estate, or unregulated derivatives—could jeopardize your RRSP and trigger tax consequences.
Q5. How does RRSP withholding tax work?
When you withdraw, your bank withholds 10% to 30% depending on the amount. But this is only a prepayment—your actual tax bill depends on your full yearly income. You may owe more or get a refund later.
