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NEW YORK (CNNMoney.com) - I've heard that if you own company stock in your 401(k) plan that you can take an "in-kind" distribution when you leave your employer, and as a result, you would pay ordinary income tax on what you paid for the stock, but long-term capital gains rates on any appreciation.

Sounds like a good deal. Is it true?

-- V. Dalconzo, Washington, Utah

Yes, it's true all right. This little-known tax benefit is known as NUA, or net unrealized appreciation, and it has the potential for saving you mucho bucks on your tax bill.

Here's a little example.

Let's say that you're ready to retire and you have $500,000 in your 401(k) account, $400,000 of which is in assorted mutual funds and $100,000 in your employer's stock.

And let's further assume that the original cost of your company stock -- that is, the amount you and/or your employer contributed to your account over the years to acquire it -- was $20,000 and the remaining $80,000 was appreciation. That $80,000 represents your NUA, or net unrealized appreciation, in employer stock.

If you decide to simply move your entire 401(k) account to an IRA rollover, your $500,000 would continue to grow without the drag of taxes until you pull your money out, but all withdrawals you make from your account would be taxed at ordinary income rates, which could go as high as 35 percent.

But you have another choice -- take advantage of the NUA strategy. To do that you would transfer only the mutual fund portion of your 401(k) to an IRA rollover and take an in-kind distribution of your company stock -- that is, you would get your 401(k) plan give you the actual shares.

In that case, you would pay tax at ordinary income rates on the original $20,000 cost of your company shares. You would also have to pay tax on the NUA, or $80,000 of net unrealized appreciation. But that amount would be taxed at long-term capital gains rates that max out at 15 percent.

In other words, instead of owing as much as 35 percent, or $35,000, on the total $100,000 of your company stock, the most you would be on the hook for is 35 percent, or $7,000, on the $20,000 original cost plus 15 percent, or $12,000 on the $80,000 of NUA, for a total tax tab of $19,000. That translates to savings of $16,000 ($35,000 vs. 19,000) in this example.

The numbers would be different, of course, if you're in a lower tax bracket. But as long as ordinary income rates are higher than long-term capital gains rates (which they are), you would still benefit. (By the way, you can also do this if you're leaving your company but don't intend to retire. Although if you're under age 55, you'll owe an additional 10 percent tax penalty.)

What if you decided to hold your company stock instead of selling immediately? Well, you would still owe tax at ordinary income rates on the $20,000 original cost of the shares, plus tax at long-term capital gains rates on the $80,000 of NUA. But you wouldn't be taxed on any additional appreciation in the value of the shares after were removed from your 401(k) until you sold them.

So, for example, if the value of your company shares rose from $100,000 the day they were transferred from your account to $120,000 and you sold within a year, you would be taxed at ordinary income tax rates. If you waited longer than a year, however, the $20,000 of additional appreciation would be taxed at the lower long-term capital gains rate.

All in all this is a pretty sweet deal, although the there are some things you should think about before going the NUA route. One is that by holding a large amount of your wealth in the shares of one company (whether in your 401(k) or afterwards), you're taking on more risk.

If your company's fortunes sour and the value of those shares head south in a hurry -- Enron being the worst-case scenario -- you could be in big trouble. So I don't recommend bulking up on company stock in your 401(k) just to cash in on this tax benefit.

And don't assume that it's a given that NUA is the best way to go. For some scenarios, such as passing money along to heirs, an IRA rollover can have advantages too.

So before you decide to take the stock, you may want to have an adviser crunch the numbers on various options. You may also want to do some more research on this issue on your own, a process you can start by clicking here and here.

One final tip: once you do a rollover, there's no going back. You can't undo it and take the stock instead. So if you own a decent amount of highly appreciated company stock in your 401(k), check out the pros and cons of NUA before you start moving your 401(k) money around. Otherwise, you could end up enriching Uncle Sam's coffers at the expense of your own.

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Walter Updegrave is a senior editor at MONEY Magazine and is the author of "We're Not in Kansas Anymore: Strategies for Retiring Rich in a Totally Changed World."

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