When it comes to investing, most people focus on how to grow their wealth. But what happens when it’s time to withdraw that money? The way your withdrawals are taxed (or not taxed) depends entirely on the type of account you’re pulling from. Not all withdrawals are created equally—some are tax-free, some are fully taxable, and some come with special rules that can impact your financial future.
Whether you’re planning for retirement, funding a child’s education, or buying a home, understanding the tax implications of withdrawals can help you keep more of your hard-earned money. Let’s break down the key differences.
RRSP: Taxed as Income
A Registered Retirement Savings Plan (RRSP) is a great way to defer taxes while you’re working, but when it’s time to withdraw, the government takes its cut. Every dollar you withdraw from an RRSP is taxed as income at your marginal tax rate. This is why RRSPs are best used for retirement when your income (and tax rate) may be lower than in your working years.
RRIF: The Age 65 Advantage
When an RRSP is converted into a Registered Retirement Income Fund (RRIF), you are required to start making minimum withdrawals each year. Before age 65, all withdrawals are taxed to you as income, just like an RRSP. However, after age 65, you can split up to 50% of your RRIF income with your spouse, which can reduce your household’s overall tax burden.
Special Exception for LIF/RRIF Income Upon the Death of a Spouse
If a LIF or RRIF withdrawal is received as a consequence of the death of a spouse or common-law partner, it is not subject to the usual tax splitting rules. Instead, the income can be reported by the surviving spouse, providing additional flexibility in tax planning.
Spousal RRSP: The Attribution Rule
If you withdraw from a Spousal RRSP, the tax treatment depends on timing. If the withdrawal happens in the year of contribution or the next two calendar years, the tax liability is shifted back to the contributing spouse—not the account holder. If you wait beyond that period, the withdrawal is taxed to the account holder. This attribution rule is important to avoid any surprises at tax time.
Spousal RRIF: Minimum vs. Excess Withdrawals
For a Spousal RRIF, the minimum required withdrawal is taxed to the account holder. However, any withdrawals above the minimum follow the same attribution rule as a Spousal RRSP—meaning they could be taxed back to the contributor if taken within the first two years of a contribution. After age 65, up to 50% of withdrawals can be split with a spouse, making it a valuable tool for income planning.
LIRA: Locked Away Until Retirement
A Locked-In Retirement Account (LIRA) is designed to hold pension money until retirement, and withdrawals are generally not allowed. Exceptions exist for financial hardship or a shortened life expectancy, but the rules vary by province.
LIF: Taxed Like a RRIF with Splitting Benefits
A Life Income Fund (LIF) is similar to a RRIF but for pension funds. Before age 65, all withdrawals are fully taxable as income. After 65, up to 50% of withdrawals can be split with a spouse, reducing overall taxes.
Special Exception for LIF/RRIF Income Upon the Death of a Spouse
If a LIF or RRIF withdrawal is received due to the death of a spouse, the usual tax treatment does not apply. The surviving spouse has options for how to handle the funds, including transferring them tax-free to their own RRSP, RRIF, or LIF, depending on eligibility.
FHSA: A First-Time Homebuyer’s Advantage
The First Home Savings Account (FHSA) offers a unique tax advantage. If used for a qualifying home purchase, withdrawals are completely tax-free. However, if you withdraw for any other reason, the entire amount is taxed as income, just like an RRSP.
RESP: Tax-Free Contributions, Taxable Growth
A Registered Education Savings Plan (RESP) has a mix of tax-free and taxable withdrawals. Your original contributions can always be withdrawn tax-free. However, withdrawals of government grants and investment growth are taxed to the student—which is usually beneficial since students typically have low incomes and pay little or no tax.
If the RESP funds are withdrawn when the student is not enrolled in a qualifying educational program, the tax treatment changes significantly:
- The growth portion is taxed to the subscriber (usually the parent) at their full tax rate plus a 20% penalty.
- Government grants must be repaid.
This makes planning RESP withdrawals carefully very important.
Non-Registered Accounts: Capital Gains May Apply
Withdrawals from non-registered investment accounts are not taxed directly, but if you have to sell an investment first, you may owe capital gains tax on any profit. The person who originally invested the money is responsible for the tax. Only 50% of a capital gain is taxable, making it more tax-efficient than fully taxable RRSP or RRIF withdrawals.
TFSA: The Ultimate Tax-Free Withdrawal Account
A Tax-Free Savings Account (TFSA) is the simplest and most flexible investment account. All withdrawals are completely tax-free, no matter the reason. Plus, any amount you withdraw gets added back to your contribution room in the following year, allowing you to re-invest without losing tax advantages.
Why This Matters for Your Financial Plan
When it comes time to access your savings, where you withdraw from can have a huge impact on how much tax you pay. A smart withdrawal strategy can:
✅ Reduce your overall tax bill
✅ Stretch your savings further in retirement
✅ Minimize tax penalties on education and home savings
✅ Help you and your spouse split income efficiently
By understanding the tax rules for different accounts, you can make informed decisions and keep more of your money working for you. A great financial plan doesn’t just focus on growing wealth—it also ensures you withdraw it wisely.
