How RRSP Withdrawals Are Taxed in Retirement
RRSP and RRIF withdrawals are fully taxable as income — not capital gains. Learn the withholding tax rates, RRIF minimums, and the drawdown order that minimizes your lifetime tax bill.
How RRSP Withdrawals Are Taxed
An RRSP is a tax-deferred account, not a tax-free one. Every dollar you contributed gave you a deduction in your working years, and every dollar you take out in retirement is taxed as ordinary income — exactly like employment income or a pension. There is no special capital gains treatment and no dividend tax credit inside an RRSP or RRIF. The withdrawal is simply added to your total income for the year and taxed at your marginal rate.
This is the core trade-off of the RRSP: you defer tax now, hoping to pay a lower rate later. For most Canadians, retirement income is lower than peak working income, so the strategy pays off. But the size of your RRSP, your other income sources, and the order in which you draw down your accounts all change the math significantly.
Withholding Tax on Lump-Sum RRSP Withdrawals
When you withdraw directly from an RRSP (before converting it to a RRIF), your financial institution deducts withholding tax immediately and sends it to the CRA. This is a prepayment, not your final tax bill — the actual amount owing is settled when you file your return. The withholding rates outside Quebec are:
| Withdrawal Amount | Withholding Rate (outside Quebec) |
|---|---|
| Up to $5,000 | 10% |
| $5,001 – $15,000 | 20% |
| Over $15,000 | 30% |
Withholding is a credit against your final tax bill — if too much was withheld, you receive a refund; if too little, you pay the difference at tax time.
A common mistake is splitting a large withdrawal into several small ones to stay in the 10% withholding band. The CRA treats this as a single transaction if done in close succession, and even when it does not, the lower withholding only delays the tax — your marginal rate at filing time is unchanged. Withholding is about cash flow timing, not your actual tax liability.
Converting to a RRIF and the Mandatory Minimum
You must convert your RRSP to a Registered Retirement Income Fund (RRIF) by December 31 of the year you turn 71. From the year after conversion, a minimum percentage must be withdrawn each year, based on your age. The percentage rises every year — about 5.28% at age 71, roughly 6.82% at 80, and about 11.92% by age 90. These minimum withdrawals are not subject to withholding tax, but they are fully taxable as income.
The RRIF minimum is where many retirees get caught. A large RRIF can force taxable withdrawals far above what you actually need to spend, pushing you into a higher bracket and, worse, into OAS clawback territory. If you have a sizeable RRSP, drawing it down strategically in your 60s — before CPP, OAS, and RRIF minimums all stack up — is often the single most valuable retirement tax move available.
One tip: if your spouse is younger, you can base your RRIF minimum on their age, which lowers the mandatory percentage and keeps more money sheltered and growing tax-deferred for longer.
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The Drawdown Order That Minimizes Lifetime Tax
Because RRSP and RRIF withdrawals are fully taxable while TFSA withdrawals are tax-free, the sequence in which you spend your accounts has a large effect on your lifetime tax bill. The conventional default — drain the non-registered account first, then the RRSP, then the TFSA — is rarely optimal. A more tax-efficient approach for many retirees is:
Draw RRSP/RRIF earlier to smooth your tax brackets
Make modest RRSP withdrawals in your 60s while your other income is low. This fills up the lower tax brackets every year instead of leaving a huge RRIF that triggers high-bracket withdrawals and OAS clawback later.
Use the TFSA as a tax-free top-up and buffer
Because TFSA withdrawals are not income, they let you cover spending spikes without bumping your taxable income into clawback range. Preserve the TFSA as a flexible tool rather than spending it first.
Coordinate with CPP and OAS timing
Delaying CPP and OAS to 70 while drawing down the RRSP in the interim can dramatically reduce lifetime tax — you convert taxable RRSP dollars at a low rate and replace them with inflation-indexed government benefits.
Frequently Asked Questions
Are RRSP withdrawals taxed as income or capital gains?
Always as ordinary income. The full amount of any RRSP or RRIF withdrawal is added to your taxable income for the year and taxed at your marginal rate. There is no preferential capital gains or dividend treatment inside a registered plan, even if the growth came from capital gains or dividends.
How can I avoid paying so much tax on my RRSP?
You cannot avoid the tax entirely — it was deferred, not eliminated. But you can reduce the total by withdrawing gradually across many years to stay in lower brackets, drawing down the RRSP in your 60s before RRIF minimums and government benefits stack up, splitting eligible pension income with a spouse after 65, and using your TFSA to avoid pushing income into OAS clawback range.
Do I pay tax on RRIF minimum withdrawals?
Yes. RRIF minimum withdrawals are fully taxable as income, even though no withholding tax is deducted at source on the minimum amount. You will need to budget for the tax owing at filing time, or request that extra tax be withheld voluntarily.
Can I split RRIF income with my spouse to lower tax?
Yes, once you are 65 or older, RRIF withdrawals qualify as eligible pension income and up to 50% can be allocated to your spouse on your tax returns. This can move income from a higher-bracket spouse to a lower-bracket one and reduce your combined tax. Direct RRSP withdrawals do not qualify for pension income splitting at any age — you must first convert to a RRIF or annuity, and even then that income only becomes splittable at age 65.