Investment adviser Rick Wood spoke recently with a client who took the same casual — some might say careless — attitude toward registered retirement savings plans as a surprising number of Canadians.

“They wanted to yank out $5,000 of their RRSP for a car loan,” said Mr. Wood, who works for TD Waterhouse in Toronto. “I’m like, ‘Oh, my gosh, here you go, you’re going to pull the money out of your RRSP, you’re going to get the withholding tax at 10 per cent right away and you’re going to buy something that’s going to depreciate something like 30 per cent as soon as you drive away.’.”

Mr. Wood, a certified financial planner, did his best to dissuade the client, who ended the conversation without making a final decision. But you could say there’s a four-in-10 chance the client would have ended up making that withdrawal.

The Bank of Nova Scotia recently issued the results of a survey that suggested 40 per cent of RRSP-holders have withdrawn money from their plan and, more alarmingly, that the average number of withdrawals was three. The average amount taken out was $18,000 — and almost half of those who made a withdrawal said they didn’t intend to pay it back.

It’s hard to issue a blanket condemnation against RRSP withdrawals because there are circumstances, such as unemployment, that can force you to dip into savings you ought not to touch. Also, the federal government offers an easy way to withdraw money to help with the cost of buying a home or enhancing your education.

And yet, it has to be said that RRSP withdrawals in general are a bad idea and should be avoided where possible. The most important reason is that removing money from a plan reduces the amount you have available to grow, tax-free, in the years until you retire. “The compounding is the magic,” said Mr. Wood, who provided two examples of the ultimate cost of RRSP withdrawals.

For example, someone who withdraws $5,000 from a plan with 30 years until retirement would forego $87,250 in retirement savings, assuming a 10-per-cent return.

And someone who takes $20,000 out of a plan with 20 years until retirement would lose out on $134,550.

You might rationalize an RRSP withdrawal by saying you’ll repay the money as quickly as possible, but human nature suggests that’s no sure thing. Anyway, repaying money withdrawn from an RRSP may not be as easy as you think. Once you’ve withdrawn a sum, you lose that amount of contribution room from your RRSP. The only way to repay the money is if you have an equal or greater amount of unused contribution room from previous years.

Still another reason to avoid RRSP withdrawals is the potentially nasty withholding tax. You’ll give up 10 per cent of withdrawals on amounts up to and including $5,000; 20 per cent for amounts between $5,000 and $20,000; and 30 per cent for larger withdrawals. (If you live in Quebec, your withholding taxes will be higher.)

More funds may be owing on your RRSP withdrawal when you calculate your income taxes for the year.

If your marginal tax rate is 30 per cent and you only paid a 20-per-cent withholding tax, then you face paying still more tax.

With house prices soaring in most parts of the country over the past few years, it’s only logical to consider using RRSP funds to help build a down payment. The federal Home Buyers’ Plan allows you to withdraw up to $20,000 for a first-time house purchase, without any withholding tax.

The down side is that you’ll have to adopt a strict repayment schedule to get that $20,000 back into your RRSP. Repayment can be stretched over 15 years, with a minimum of one-15th of the amount owing to be repaid annually. If you don’t make the required repayment, the amount is added to your income for the year and thus becomes taxable. The Lifelong Learning Plan allows you to remove a total of $20,000 from your RRSP to pay for educational or training courses for you or your spouse, with a yearly maximum of $10,000. The repayment period for this program is 10 years. Sound arguments can be made for withdrawing RRSP money to buy a home or upgrade your education.

Taking courses can improve your earning potential, while homes have appreciated strongly in recent years through most parts of the country.

But given the potentially serious blow to your RRSP’s earning power, Mr. Wood suggests you think carefully about removing money from your retirement savings.

Expect an argument if you consult an adviser about such a move, Mr. Wood said. “Any time somebody dips into an RRSP, for me the alarm bells are going off.”

rcarrick@globeandmail.com