The 31-year-old former marketing manager figures this offers many advantages, not least of which is a significant tax shelter. "Had I not used my RRSP, I would have been taxed on the entire severance amount, which would have reduced my award in half."

She also notes that the RRSP is flexible enough to accommodate emergency withdrawals if she needs them. But "my hope is that I'll be able to get another job right away and won't need to draw on those funds. At my present age, the money would be able to grow on a tax-deferred basis for several years and provide me with a really nice nest-egg at retirement."

Ms. Young is not the only Canadian pondering how best to handle severance pay. In the current economic slump, tens of thousands have either been laid off or accepted voluntary buyouts.

And many financial experts say the RRSP is one of their best investment options if they're leaving with a sum of money.

It's an "extremely powerful" tool for young people to have in their financial arsenal, says Patricia Tyrrell, an investment adviser with HSBC Securities (Canada) Inc. in Toronto. "The RRSP, with its compounding and tax-deferred growth. really provides the best kind of return available."

Michel Matifat, a partner in charge of personal financial planning at KPMG LLP's Vancouver office, agrees. "I always recommend maximizing RRSP contributions, because it may be the opportunity of a lifetime to make such a huge contribution."

The reason? Ex-employees are entitled to transfer up to $2,000 of a retiring allowance into their RRSP for each year of service with that employer prior to 1996.

And they can transfer up to $3,500 into the RRSP for each year they were employed prior to 1989 but didn't belong to a company pension plan.

That's what Jim Batten, a 54-year old former station attendant with Air Canada did last September when he accepted a voluntary severance package of more than $40,000 after 35 years with the carrier.

"The RRSP represented a great opportunity for me to invest this money over the next six years before the Canada Pension Plan is able to subsidize my company pension," he says.

Former employees can also use any undeducted RRSP room accumulated since 1991 to absorb part of their lump-sum severance payments. However, the yearly entitlement should be deducted first because it is available only during the year the severance was paid. Undeducted RRSP room, on the other hand, is cumulative and can be carried forward to future years, Mr. Matifat notes.

Failure to tax-shelter all, or a significant portion, of a severance package could lead to an enormous tax bill when it comes time for the ex-employee to file a tax return.

The federal government specifies that tax of 10 per cent for up to $5,000; 20 per cent from $5,000 to $15,000; and 30 per cent for over $15,000, be withheld from a retiring allowance. So, someone who received $50,000 in cash would have 30 per cent, or $15,000, withheld.

In Ontario, where residents can pay as much as 46.41 per cent in federal and provincial taxes, that means an additional 16.41 per cent -- $8,205 -- would still be owing.

"People sometimes forget that," Mr. Matifat says. "They think the withheld amount on their severance pay is the final tax, but it's not. As a result, they may end up with additional taxes payable the following April when filing their personal tax return. This can also hurt their cash flow."

Another tip: financial experts advise that where a portion of a person's severance is earmarked for their RRSP, it is more tax-efficient if the employer makes a direct deposit to the plan. This way, the employer doesn't have to withhold tax on that portion of the deposit, nor does the ex-employee have to wait until the following year to file a tax return and obtain a refund for the withheld amount.

Another important part of the severance exercise may involve deciding what to do with prior contributions to a company pension fund. There are two main types of pension funds -- defined-contribution and defined-benefit plans.

The proceeds of most defined-contribution plans will be transferred to a personal, locked-in RRSP. However, many employers still offer defined-benefit plans, which are designed to provide employees with a full pension at 65, or earlier. Under a defined-benefit plan, ex-employees can choose to keep the pension money with the company until it vests or take the reduced (also known as the commuted) value and transfer the funds into a locked-in RRSP.

How do individuals determine if they're making the right choice?

"I would put my dividing line at about 45 years of age," says Mr. Matifat. "Someone under 45 is better off transferring the commuted value to a locked-in RRSP about 90 per cent of the time, mainly because their investment timeline will be at least 10 years, which in most cases would give them a better return than the employer's promised pension."

But for a person over 45, who's closer to retirement, it's a different story. That person's investment horizon will be shorter and, with market volatility, "they might not be able to achieve the same rate of return their employer's pension provides," Mr. Matifat says.

Other factors include how well the company pension plan is performing.

"If it's been around for a while, is well managed, and has consistently performed well in the market, those factors might influence an ex-employee to stay in the plan," says Todd Kennedy, an investment adviser with HSBC Securities in Ottawa.

On the other hand, being able to place those pension funds in a self-directed, (albeit locked-in) RRSP, gives the ex-employee a new measure of flexibility and control, which is appealing to many people, Mr. Kennedy adds.

One other point: If an ex-employee receives the commuted value for their defined-benefit plan, they should obtain the amount of their pension-adjustment reversal (PAR) from the company's pension administrator as soon as possible because there's a good chance this will boost the amount they are eligible to contribute to their RRSP.

If, for example, a person's pension-adjustment amount had previously diminished RRSP eligibility by $25,000, for which he or she received a commuted value of $18,000, the PAR would be $7,000.