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Layoff looming? Take steps to ease the blow

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It pays to be prepared in today's job market, just in case a pink slip lands on your desk. Here are some additional tips for building an unemployment self-defense kit. Remember: The goals are to increase your cash liquidity, minimize expenses and give yourself as many options as possible.

Rethink your 401(k). It sounds heretical, but if you don't have an adequate emergency fund, you may want to reduce or suspend 401(k) contributions and divert that money to a rainy-day stash. Doing so subjects you to a triple whammy: You lose the tax break on money going into the plan and the tax-deferred growth inside it. But that's less painful than the punishment you would face if you have to tap retirement funds. If you are under age 55 when you tap a 401(k), you would pay not only income taxes at your top marginal rate, plus state income taxes, but also a 10 percent penalty.

Banish 401(k) debt. If you borrow money from your 401(k) and leave your job (voluntarily or involuntarily), you have only 60 days to repay the loan. If you can't, the unpaid balance is treated as a distribution subject to income taxes and penalty. You're better off tapping a home equity line to pay it off.

Exercise your options. You have 90 days to exercise employer-provided stock options after leaving a company. If the stock is trading above your option price, you could exercise and sell your options on the same day and pocket the proceeds. You'd owe income taxes on the difference between your option or "strike" price and the sale price. This applies to nonqualified stock options, which are always taxed at your regular income rate, as well as incentive stock options, which normally benefit from more preferential capital-gains treatment.

Pay off credit cards. This is always a good idea, but it's critical to lighten your load if you risk losing a paycheck.

Keep your ears open. Know what kinds of severance packages are being offered. You might not have much time to negotiate if your boss springs an offer on you. Most packages have three components: severance pay, help finding a new job and insurance continuation for a limited time.

Collect your benefits. Should the ax fall, don't neglect to file for unemployment-insurance benefits.