Ep # 133 - Retirement Taxes 101: What You Need to Know
Ever wonder how retirement income is taxed in Canada? We look at tax brackets, RRSPs, RRIFs, TFSAs, CPP, OAS, and pension income is crucial for optimizing your retirement tax strategy. They explain marginal vs. average tax rates, the impact of dividends and capital gains, and how to minimize OAS clawbacks. Tune in to learn how to reduce your lifetime tax bill and keep more of your savings working for you.
What You'll Learn in Today's Episode
Retirement Income is Taxed Differently – Unlike employment income, retirees often draw from multiple sources like RRSPs, RRIFs, TFSAs, pensions, CPP, and OAS, each with its own tax treatment. Managing these sources strategically can minimize taxes over a lifetime.
Marginal vs. Average Tax Rate Confusion – Many people mistakenly believe that earning more income means all their income is taxed at a higher rate. In reality, only the income within each tax bracket is taxed at that rate, making marginal tax planning essential.
The OAS Clawback Risk – Old Age Security (OAS) payments can be reduced if a retiree’s income exceeds a certain threshold (around $93,000 in 2025). Tax planning strategies, such as controlling dividend income, can help reduce or avoid clawbacks.
The Role of TFSAs in Tax-Free Retirement Income – Unlike RRSPs and RRIFs, withdrawals from TFSAs are completely tax-free and do not affect taxable income or government benefits, making them a valuable tool for flexible retirement spending.
The Power of Pension Income Splitting – Retirees with eligible pension income, including RRIF withdrawals after age 65, can split up to 50% of their income with a spouse to reduce overall household taxes and take advantage of the $2,000 pension income tax credit.
Ideas Worth Sharing
· "Tax planning in retirement isn’t just about paying less today—it’s about keeping more of your money over a lifetime."
· "RRSPs defer taxes, not eliminate them—how and when you withdraw makes all the difference."
· "Dividends sound great, but they can actually trigger OAS clawbacks if you’re not careful."
· "Your TFSA is a retirement superpower—tax-free growth and tax-free withdrawals!"
· "Managing your income sources wisely can mean the difference between paying more tax or keeping more of your hard-earned savings."
Resources
1. Understanding Canadian Retirement Income Taxation
o Canada Revenue Agency (CRA) Tax Brackets: View tax rates and brackets
o RRIF Withdrawal Rules and Minimums: Learn more about RRIFs
2. Old Age Security (OAS) Clawback Information
o OAS Eligibility, Payments & Clawback Threshold: Government of Canada OAS Information
3. Retirement Tax Strategies & Income Planning
o TFSA Contribution Limits & Withdrawal Rules: Guide to TFSAs
o Pension Income Splitting Rules & Benefits: CRA Pension Income Splitting
4. Your Retirement Planning Simplified Podcast & Resources
o Podcast Archive: Your Retirement Planning Simplified
How Retirement Income is Taxed in Canada:
A Complete Guide
Planning for retirement? Understanding Canada's tax system is crucial for making your savings last. While many retirees focus on reducing their annual tax bill, smart planning requires a long-term perspective. Let's explore how different retirement income sources are taxed and strategies to maximize your after-tax income.
Understanding Canada's Tax System
Canada employs a progressive tax system where higher income levels are taxed at higher rates. However, this doesn't mean all your income gets taxed at your highest rate. Only the portion falling into each bracket is taxed at that bracket's rate.
In retirement, you'll likely have multiple income sources:
RRSPs and RRIFs
TFSAs
Government benefits (CPP and OAS)
Non-registered investments
Employer pensions
Each of these is taxed differently, creating opportunities for tax-efficient withdrawal strategies.
How Different Retirement Income Sources Are Taxed
RRSPs and RRIFs
Contributions reduce your taxable income while working
All withdrawals are fully taxed as regular income
Must convert RRSP to RRIF by age 71
Mandatory minimum RRIF withdrawals start at 72
TFSAs
Contribute after-tax dollars
All withdrawals are completely tax-free
Don't affect income-tested benefits like OAS
Excellent tool for tax-free retirement income
Non-Registered Investments
Different types of investment income receive different tax treatment:
Interest income (GICs, bonds): Fully taxable
Dividends: Eligible for tax credits but include gross-up that can affect OAS
Capital gains: Only 50% taxable, making them more tax-efficient
Government Benefits
CPP and OAS are fully taxable
OAS can be clawed back if income exceeds $93,000 (2025)
Strategic planning needed to protect these benefits
Smart Tax Planning Strategies
1. Income Splitting
If you're married or have a common-law partner, consider:
Splitting eligible pension income after age 65
Using spousal RRSPs
Equalizing retirement assets between spouses
2. Strategic Withdrawals
Don't wait until mandatory RRIF withdrawals begin. Consider:
Taking smaller RRSP withdrawals earlier
Balancing withdrawals across tax-advantaged accounts
Managing tax brackets to minimize lifetime taxes
3. Maximizing Tax-Free Growth
Use TFSAs for investments with highest growth potential
Consider shifting taxable investments to tax-free accounts
Protect government benefits with tax-free income
Building Your Retirement Tax Strategy
Effective tax planning in retirement requires understanding how different income sources interact and impact your overall tax situation. Work with a financial advisor to create a personalized withdrawal strategy that:
Minimizes lifetime taxes
Protects government benefits
Provides reliable income
Maintains financial flexibility
Remember: The goal isn't just to pay less tax today, but to optimize your after-tax income throughout retirement.
Subscribe to Your Retirement Planning Simplified for more insights on retirement planning and tax-saving strategies. Stay tuned for our next article on common retirement tax mistakes to avoid!