Americans hate paying taxes on their hard-earned income. This sentiment is one of the reasons that tax-deferred retirement savings plans, such as 401(k) plans, have become so popular.

There is no question a 401(k) is a great way to save for retirement. And with the baby boomer generation closing in on retirement age and people increasingly changing jobs these days, plenty of workers are faced with decisions about what to do with 401(k) holdings from old jobs.

Making investment decisions strictly on the basis of tax deferment, however, isn't always the best strategy. When you have your employer's stock in a qualified retirement plan, there is a little-known tax play you'll want to check out when you decide to retire or leave your company.

Company stock is given special tax treatment when it's time for distribution. Its increased value qualifies for capital gains taxation, rather than ordinary income, if you don't roll it into an IRA. So if you plan to roll your 401(k) into an IRA, you may want to actually take your company stock separately.

You will only have to pay ordinary tax on your original cost basis. For instance, if you have $50,000 worth of company stock in your 401(k) and the original investment was $15,000, you will pay tax on $15,000 when you take it out. The tax will be at your regular tax rate.

Regardless of how long you hold the stock, you will pay tax on the remaining balance at the long-term capital gains rate of 15%. You do not have to hold it for the usual 12 months to qualify it for the long-term capital gains rate. Regardless of how long the stock was in your 401(k) -- even if only for a day -- the price buildup qualifies for the more favorable 15% capital gains tax rate. The IRS calls this kind of situation net unrealized appreciation -- NUA.

You could be creating an extra amount of tax if you roll the stock into the IRA. When you take the stock out of the IRA, you will pay taxes at your ordinary income tax rates on the market value as of the date of distribution. You do not get to use the capital gains rate.

Back to our example of $50,000:

• Original cost basis: $15,000 taxed at 28%: $4,200

• Appreciation: $35,000 taxed at 15%: $5,250

• Total tax: $9,450

If the stock grew to $100,000:

• Original basis: $15,000 taxed at 28%: $4,200

• Appreciation: $85,000 taxed at 15%: $12,750

• Total tax: $16,950

If, instead of taking an immediate distribution of the stock, you rolled it into the IRA, there would be no tax initially. However, when the stock is distributed from the IRA, it will be taxed at ordinary income tax rates. In our illustration, the total tax on $100,000 would be $28,000, assuming a 28% ordinary tax rate.

In our examples involving that $50,000 investment that grows to $100,000, the decision to roll it into an IRA is a costly one:

• Taxes using NUA strategy: $16,950

• Taxes after rolling stock over to IRA: $28,000

• Additional cost: $11,050

In this example, you would have saved $11,050 by not rolling the stock into the IRA.

Incidentally, if you chose to have the company stock distributed instead of rolling it over, you must take the stock distribution in the same tax year as the IRA rollover.

Now that companies cannot force an employee to load up excessively on company stock, the issue of net unrealized appreciation is not as big as it used to be. Regardless of the amount of stock, you may still benefit from using this strategy.

Always coordinate this strategy with your accountant to make sure you are running the numbers accurately. For an IRS Code reference, please see

IRS 402 (e)(4)(E).

Vern Hayden runs Hayden Financial Group, a small boutique that does financial planning and investment management in Westport, Conn. An author of several books, Hayden specializes in portfolio management, specializing in mutual funds on a fee-only basis and financial planning with a focus on retirement planning.