Which of the following best describes the taxation of RRIF withdrawals?

RRIF withdrawals are classified as ordinary income for tax purposes. This means that when an individual withdraws funds from their Registered Retirement Income Fund (RRIF), the amount withdrawn is added to their taxable income for the year and will be taxed at their marginal tax rate.

This treatment is significant because it reflects the intention of RRIFs as a way to provide retirement income, which is subject to the regular income tax framework rather than more favorable capital gains rates. By being taxed as ordinary income, the tax system ensures that retirement savings that have grown tax-deferred during the accumulation phase are eventually taxed when they are utilized as income.

Furthermore, it’s important to recognize that RRIF withdrawals are indeed subject to taxes, contradicting any notion that they might not be taxed or could be taxed as capital gains or corporate rates, which apply in entirely different contexts. Such distinctions are crucial for individuals planning their withdrawals strategically to manage tax implications effectively.