Registered Retirement Savings Plans (RRSPs) are one of Canada’s most effective retirement tools. They allow your money to grow tax-sheltered for decades, helping you build wealth for the future. But with this tax advantage comes strict rules — and breaking them can lead to unexpected Canada Revenue Agency (CRA) penalties.
From withdrawing too early to exceeding contribution limits or holding disallowed investments, here are three costly RRSP mistakes that can hurt your retirement savings and what you can do to avoid them.
Mistake 1: Withdrawing While Still Working
RRSP withdrawals are taxable income in the year you take them. If you withdraw while still earning employment or self-employment income, you risk being bumped into a higher tax bracket.
Consequences include:
- Increased tax withholding by your financial institution (up to 30% in some cases)
- Higher overall marginal tax rate at tax filing
- Reduced net income and faster depletion of retirement savings
Tip: Delay major withdrawals until after retirement when your taxable income is typically lower. Alternatively, spread out withdrawals across several years to reduce withholding and tax burdens.
Mistake 2: Over-Contributing to Your RRSP
Over-contributions are one of the biggest traps retirees and savers face.
- For 2025, the maximum contribution limit is the lesser of 18% of earned income from 2024 or $32,490.
- The CRA provides a $2,000 lifetime buffer, but anything above this incurs a 1% monthly penalty until corrected.
Why it happens:
- Employer matching plans
- Contributions to spousal RRSPs
- Forgetting to check contribution room on your Notice of Assessment
Tip: Always verify your contribution room using CRA’s My Account. If you over-contribute, act quickly and withdraw the excess to stop penalties.
Mistake 3: Holding Unauthorized Investments in Your RRSP
Not every asset is eligible to be held in an RRSP. Placing non-qualified investments in your account can trigger serious penalties and may compromise the tax-sheltered status of your RRSP.
Examples of non-qualified assets:
- Shares of private or foreign companies
- Direct ownership of real estate
- Certain high-risk derivatives
Qualified investments include:
- Canadian-listed stocks and ETFs
- Mutual funds
- Government and corporate bonds
Tip: Stick to CRA-approved investment types. When in doubt, consult your financial institution or advisor before placing assets in your RRSP.
Tax Withholding on RRSP Withdrawals
Here’s what financial institutions withhold when you take money out of your RRSP:
| Withdrawal Amount | Withholding Tax (Outside Quebec) | Withholding Tax (Quebec) |
|---|---|---|
| Up to $5,000 | 10% | 19% |
| $5,001 – $15,000 | 20% | 24% |
| Over $15,000 | 30% | 29% |
Important: These are just prepayments. Your actual tax bill may be higher (or lower) depending on your total income for the year.
How to Avoid CRA Penalties
- Time withdrawals carefully — wait until retirement or spread them over multiple years.
- Track contribution room — check your Notice of Assessment and CRA online account.
- Stick to qualified assets — invest only in CRA-approved instruments.
- Act fast on over-contributions — use the $2,000 buffer wisely and remove excess funds quickly.
- Plan strategically — consider smaller, staggered withdrawals instead of lump sums.
RRSPs remain one of the most effective retirement savings vehicles in Canada. But poor planning can trigger hefty CRA penalties, reducing the money you’ve worked so hard to save.
By avoiding withdrawals while working, monitoring contribution room, and sticking to qualified investments, you can maximize your savings and enjoy a stress-free retirement.
FAQs
Yes, but it will be added to your taxable income for the year and may push you into a higher tax bracket.
Anything above your limit plus the $2,000 buffer is penalized at 1% per month until corrected.
Private company shares, foreign property, and some derivatives are not permitted. Only qualified investments like ETFs, mutual funds, and Canadian-listed stocks are allowed.