RESP Withdrawals: Why You Should Pull Government Money First

The Canada Revenue Agency does not require you to pull grant money first when your kid starts university. That's the problem.

Most parents default to withdrawing their own contributions early because it feels clean. No tax event, no CRA reporting, just money you put in coming back out. By the time the student hits third or fourth year, the account balance has shrunk, the grant portion now dominates what's left, and you're pulling Educational Assistance Payments in tax years when the student may have co-op income or a part-time job pushing them into an actual bracket. You've sequenced it backwards.

The Two Withdrawal Types and Why Order Matters

An RESP holds three kinds of money: your contributions, government grants (CESG), and growth on both. When you withdraw, you're making one of two requests. A Post-Secondary Education (PSE) withdrawal pulls out your contributions only. Tax-free to the student, because it's after-tax money you already paid tax on. An Educational Assistance Payment (EAP) pulls out grants plus growth. Taxable to the student as income in the year received.

The instinct is to take PSE first and leave the "tax problem" for later. That instinct costs families money, sometimes thousands, because it ignores what the student's tax situation actually looks like.

A full-time university student in first year, taking a standard course load, typically has little to no income. The basic personal amount in Canada for 2024 is $15,705. A student can receive that much in income and pay zero federal tax. Provincial credits push the effective threshold higher, in Ontario, closer to $11,000 before any real tax burden appears, and tuition credits shelter even more. First and second year are when you have the most tax room to fill. That's when EAP withdrawals should happen.

How to Actually Sequence It

Start with EAPs in year one. Pull $15,000 to $18,000 if the student has no other income and you're funding the full cost of school. The student reports it, claims tuition and the basic personal amount, and pays nearly nothing. Repeat in year two. If the RESP is large enough, you can clear most or all of the grant and growth in the first half of the degree, during the years when the student's tax return has room.

PSE withdrawals come later, in third and fourth year, or whenever the student picks up co-op terms, teaching assistant income, or part-time work that starts filling the bottom bracket. At that point, pulling your own contributions, tax-free money, keeps you from stacking EAP income on top of employment income and pushing the student into an unnecessarily high marginal rate.

This is not theoretical. A student in fourth year earning $12,000 from a co-op term who then receives $16,000 in EAP income has $28,000 in total income. After tuition credits, they'll still pay tax. The same student receiving $16,000 in PSE withdrawals pays zero, because PSE isn't income. Running EAPs early and PSE late uses the tax system as it's actually structured.

When the Plan Doesn't Match the Kid

If your child does not attend post-secondary, the grants go back to the government. Contributions come back to you, tax-free. Growth can roll into your RRSP if you have room, up to $50,000 lifetime. If you don't have RRSP room, growth gets taxed as income to you, plus a 20% penalty. It's punitive by design.

That risk is what makes some parents hesitant to maximize CESG contributions in the first place. The counter is that free government money, even with clawback risk, beats no free government money in most scenarios where the kid is likely to go. If the risk feels material, fund the RESP to the grant match threshold and put additional education savings in a TFSA in the parent's name. TFSAs don't get the 20% grant, but they also don't get the 20% penalty.

The withdrawal order matters because tax room is not evenly distributed across a degree. It concentrates in the early years. Use it then.