RRSP vs TFSA vs Non-Registered: Where to Put Your Lump Sum
A complete decision framework for choosing the optimal account type for your lump sum investment in 2026
Key Takeaways
- 1Understanding rrsp vs tfsa vs non-registered: where to put your lump sum is crucial for financial success
- 2Professional guidance can save thousands in taxes and fees
- 3Early planning leads to better outcomes
- 4GTA residents have unique considerations for investment strategy
- 5Taking action now prevents costly mistakes later
Quick Summary
This article covers 5 key points about key takeaways, providing essential insights for informed decision-making.
You have a significant lump sum to invest—from a severance package, inheritance, business sale, or other life event. Before choosing what to invest in, you face an equally important question: where should you invest it? The choice between RRSP, TFSA, and non-registered accounts can mean tens of thousands of dollars in lifetime taxes. This guide provides a clear framework for making the optimal account decision in 2026.
Understanding the Three Account Types
Each account type has distinct tax treatment. Understanding these differences is essential before deciding where to place your lump sum.
TFSA (Tax-Free Savings Account)
How TFSA Works
- Contributions: After-tax dollars (no deduction)
- Growth: Tax-free forever
- Withdrawals: Tax-free, anytime, for any reason
- Room restoration: Withdrawn amounts become new room next January
- 2026 annual limit: $7,000
- Cumulative room: Up to $102,000 if never contributed since 2009
- Income testing: Doesn't affect OAS, GIS, or other benefits
RRSP (Registered Retirement Savings Plan)
How RRSP Works
- Contributions: Tax-deductible (reduces taxable income)
- Growth: Tax-deferred (no tax until withdrawal)
- Withdrawals: Fully taxable as income
- Room restoration: Lost permanently when you withdraw
- 2026 limit: $33,810 or 18% of earned income + unused room
- Deadline: March 3, 2027 for 2026 tax year contributions
- Conversion: Must convert to RRIF by December 31 of year you turn 71
Non-Registered (Taxable) Accounts
How Non-Registered Accounts Work
- Contributions: After-tax dollars, no limit
- Growth: Taxable annually (dividends, interest) or at sale (capital gains)
- Withdrawals: No restrictions, capital gains taxed at sale
- Tax efficiency varies: Canadian dividends and capital gains favored
- Tax-loss harvesting: Can offset gains with losses
- Flexibility: Complete control, no age restrictions
The Account Priority Framework for Lump Sums
For most Canadians receiving a lump sum, here's the recommended priority order:
Standard Priority Order
- 1. Max TFSA first
Tax-free growth AND withdrawals. Complete flexibility. No impact on government benefits. $7,000/year + any unused room.
- 2. Consider RRSP based on tax situation
Great if high tax bracket now, expect lower retirement income. Employer match is free money. Up to $33,810/year + unused room.
- 3. Non-registered for remaining funds
After maxing registered accounts. Focus on tax-efficient investments: Canadian dividends, capital gains-oriented strategies.
When This Order Changes
The standard priority isn't always right. Here's when to adjust:
RRSP Before TFSA When:
- Very high current income: Marginal rate over 45% AND expect much lower retirement income
- Employer RRSP match: Free money should never be left on table
- Home Buyers' Plan: Need $60,000 for first home purchase
- Lifelong Learning Plan: Need funds for qualifying education
- Large unused RRSP room: Decades of room can compound significantly
TFSA Definitely First When:
- Low/moderate income: Under $50,000, RRSP deduction isn't as valuable
- Uncertain future needs: May need access to funds before retirement
- Already have pension: More RRSP/RRIF income could trigger OAS clawback
- Variable income: Self-employed, commission-based, project work
- Young investor: Decades of tax-free growth is incredibly powerful
The Math: TFSA vs RRSP for Lump Sums
Let's see how the numbers work in real scenarios:
Scenario 1: Same Tax Rate Now and Retirement
$10,000 Invested, 7% Return, 20 Years, 30% Tax Rate
TFSA:
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Get Free Expert Advice$10,000 invested → $38,697 after 20 years → Withdraw $38,697 tax-free
RRSP:
$10,000 invested + $3,000 refund reinvested = $13,000 total → $50,306 after 20 years → Pay 30% tax = $35,214 after tax
Winner: TFSA by $3,483 (10%)
TFSA wins when tax rates are equal because the growth on the "reinvested refund" in RRSP is eventually taxed
Scenario 2: High Tax Now, Low Tax in Retirement
$10,000 Invested, 7% Return, 20 Years, 45% Now → 25% Retirement
TFSA:
$10,000 invested → $38,697 after 20 years → Withdraw $38,697 tax-free
RRSP:
$10,000 invested + $4,500 refund reinvested = $14,500 total → $56,111 after 20 years → Pay 25% tax = $42,083 after tax
Winner: RRSP by $3,386 (9%)
RRSP wins when retirement tax rate is significantly lower because the arbitrage between tax rates exceeds TFSA's tax-free growth advantage
Scenario 3: Low Tax Now, Higher Tax in Retirement
$10,000 Invested, 7% Return, 20 Years, 25% Now → 35% Retirement
TFSA:
$10,000 invested → $38,697 after 20 years → Withdraw $38,697 tax-free
RRSP:
$10,000 invested + $2,500 refund reinvested = $12,500 total → $48,371 after 20 years → Pay 35% tax = $31,441 after tax
Winner: TFSA by $7,256 (23%)
TFSA dramatically wins when retirement tax rate is higher—this can happen with successful investing, pensions, or OAS clawback
Key Decision Factors for Your Situation
Factor 1: Current vs. Future Tax Rates
This is the most important factor. Consider:
- Current marginal rate: Check Ontario 2026 tax brackets for your income level
- Expected retirement income: Pensions + CPP + OAS + investment withdrawals
- Lifestyle expectations: Will you spend more or less in retirement?
- OAS clawback: Starts at ~$90,000 in 2026—RRSP withdrawals count, TFSA doesn't
Ontario 2026 Marginal Tax Rates
- Up to $52,886: 20.05%
- $52,886 to $93,580: 29.65%
- $93,580 to $106,717: 32.98%
- $106,717 to $150,000: 37.16%
- $150,000 to $177,882: 43.41%
- $177,882 to $220,000: 44.97%
- $220,000 to $253,414: 48.35%
- Over $253,414: 53.53%
Factor 2: Flexibility Requirements
How likely are you to need access to these funds before retirement?
- TFSA: Complete flexibility. Withdraw anytime, room restored next year.
- RRSP: Withdrawals are taxable AND you lose contribution room permanently.
- Non-registered: Complete flexibility, only capital gains/dividends trigger tax.
If You Might Need the Money
If there's any chance you'll need access to your lump sum before retirement (career change, emergency, business opportunity, home purchase), weight TFSA heavily. An RRSP withdrawal at your current marginal rate AND loss of contribution room is a double penalty.
Factor 3: Pension and Retirement Income
If you already have significant guaranteed retirement income:
- Large DB pension + CPP + OAS: This could push you into higher brackets and trigger OAS clawback. TFSA becomes more valuable.
- No pension, minimal CPP: RRSP withdrawals will be taxed at lower rates. RRSP more attractive.
- Mid-range pension: Balance both TFSA and RRSP for flexibility.
Asset Location: What to Hold Where
Once you decide on account allocation, optimize WHAT you hold in each account to minimize taxes further.
Optimal Asset Location Strategy
TFSA (Tax-Free = High Growth)
- US stocks and ETFs (no foreign withholding issue)
- Aggressive growth ETFs (XEQT, VEQT)
- High-growth individual stocks
- REITs (if not holding in RRSP)
RRSP (Tax-Deferred = Inefficient Assets)
- Bonds and fixed income (interest fully taxable otherwise)
- REITs (distributions often ordinary income)
- US dividend stocks (withholding tax exempt in RRSP)
- International stocks with high dividends
Non-Registered (Taxable = Tax-Efficient Assets)
- Canadian dividend stocks (eligible dividend tax credit)
- Canadian equity ETFs (capital gains treatment)
- Growth stocks with minimal dividends
- Assets for potential tax-loss harvesting
Lump Sum Allocation Examples
Example 1: Moderate Income, Young Investor
Maria: $60,000 Lump Sum, Age 32, $75,000 Salary
Available Room:
TFSA: $52,000 (unused since turning 18). RRSP: $40,000 unused.
Recommendation:
- $52,000 → Max TFSA with XEQT (100% equity, 30+ years to grow)
- $8,000 → RRSP with VEQT (builds room usage, 29.65% deduction)
Rationale:
At 29.65% marginal rate, RRSP deduction isn't as valuable. Better to prioritize 30+ years of tax-free growth in TFSA. Can always contribute more to RRSP in higher-income years.
Example 2: High Income, Pre-Retirement
James: $200,000 Lump Sum, Age 55, $180,000 Salary
Available Room:
TFSA: $7,000 (has been contributing annually). RRSP: $120,000 unused (pension adjusted).
Recommendation:
- $7,000 → Max TFSA with VBAL (balanced for near-retirement)
- $80,000 → RRSP (stay below $100K to avoid higher bracket, 43.41% deduction)
- $113,000 → Non-registered with VDY/Canadian dividend stocks
Rationale:
At 43.41% marginal rate, RRSP deduction is highly valuable. But don't over-contribute if retirement income will also be high. Expects $90K+ retirement income (pension + CPP + RRSP), so not contributing full room to avoid future OAS clawback. Non-registered goes to Canadian dividends for tax efficiency.
Example 3: Self-Employed, Variable Income
Lisa: $100,000 Business Sale, Age 45, Variable Income
Available Room:
TFSA: $35,000 unused. RRSP: $90,000 unused. Income varies $40K-$120K annually.
Recommendation:
- $35,000 → Max TFSA with VGRO (access if income dips)
- $40,000 → RRSP (claim deduction in high-income years only)
- $25,000 → Non-registered emergency/opportunity fund
Rationale:
Variable income means flexibility is crucial. TFSA is accessible without tax hit. RRSP contribution made but deduction claimed only in years income exceeds $100K (higher brackets). Non-registered provides cushion for lean years without losing registered room.
Non-Registered Strategies for Large Lump Sums
When lump sums exceed registered room, non-registered investing requires specific strategies:
Tax-Efficient Investment Selection
Tax Treatment in Non-Registered Accounts
- Canadian eligible dividends: Gross-up by 38%, then dividend tax credit. Effective rate ~25% in Ontario (vs. 53% for interest at top bracket).
- Capital gains: Only 50% included in income (67% above $250K). Top effective rate ~27% (vs. 53% for interest).
- Interest income: 100% taxable at marginal rate. Most tax-inefficient.
- Foreign dividends: Taxed as regular income + potential withholding. Least efficient in non-registered.
Tax-Loss Harvesting in Non-Registered
Non-registered accounts allow a powerful strategy unavailable in registered accounts:
- Sell losing investments to realize capital losses
- Offset gains in current year or carry losses back 3 years/forward indefinitely
- Buy similar (not identical) investment to maintain market exposure
- 30-day superficial loss rule: Can't buy identical investment within 30 days before/after sale
Common Mistakes to Avoid
Account Selection Mistakes
- Always choosing RRSP for the "deduction": The deduction isn't free money— you pay tax eventually. If retirement rate equals current rate, TFSA wins.
- Ignoring TFSA room: Many Canadians have large unused TFSA room. Check CRA My Account for your exact cumulative limit.
- Wrong assets in wrong accounts: Bonds in TFSA, US stocks in RRSP, Canadian dividends in non-registered—optimize asset location.
- Over-contributing to RRSP: If you have a pension and expect high retirement income, excess RRSP can trigger OAS clawback and high withdrawal taxes.
- RRSP withdrawals before retirement: Unless very specific circumstances (Home Buyers' Plan, Lifelong Learning, extremely low income year), RRSP withdrawals before retirement destroy wealth.
- Ignoring employer match: If employer matches RRSP contributions, that's 50-100% immediate return. Always maximize match before other investments.
Your Account Decision Framework
Step-by-Step Account Selection
- Step 1:Check CRA My Account for exact TFSA and RRSP room available.
- Step 2:Calculate your current marginal tax rate (Ontario 2026 brackets).
- Step 3:Estimate retirement income (pension + CPP + OAS + investment withdrawals).
- Step 4:If retirement rate will be significantly lower (20%+ difference), prioritize RRSP. If similar or higher, prioritize TFSA.
- Step 5:Consider flexibility needs. If uncertain about future access, weight TFSA.
- Step 6:Allocate remaining funds to non-registered with tax-efficient investments.
Conclusion: The Right Account Can Save Tens of Thousands
The choice between TFSA, RRSP, and non-registered accounts isn't just administrative— it's a decision that compounds over decades. A $100,000 lump sum in the wrong account type could cost $20,000+ in unnecessary taxes over 20 years.
For most Canadians with a lump sum, the framework is straightforward: max TFSA first for its unmatched combination of tax-free growth and flexibility, then consider RRSP based on your specific tax situation, and finally use non-registered accounts with tax-efficient investments for amounts exceeding registered room.
The key is understanding your current and future tax situation. Take the time to run the numbers for your specific circumstances—the payoff is substantial.
Get Personalized Account Strategy
Our financial planning specialists help GTA clients optimize account selection for their specific lump sum situations—inheritance, severance, business sales, and more.
In a free consultation, we'll:
- Analyze your current and projected tax situation
- Calculate optimal TFSA vs RRSP allocation for your lump sum
- Recommend tax-efficient investments for non-registered funds
- Build a comprehensive wealth plan across all account types
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