Does dividend on 401K have any effect on gains
Adjusting for a market change from day to day, the dividend should have no impact on you. Your X shares time $Y should be nearly identical right after that dividend hits the account.  And within the 401(k) or IRA for that matter, the accounting doesn't matter most of the time. Outside a retirement account, you need to pay tax on the dividend, and add the newly purchased shares' cost to your cost basis. It appears from your description that the 401k account has the automatic dividend reinvestment policy, and that the end result is exactly the same as the external account with the same policy. I.e.: no difference, the dividend affected the 401k account in exactly the same way it affected the external account. The only thing is that for external account you can take the dividend distribution, while for 401k you cannot - it is reinvested automatically. Were you expecting something else?
"While @JB's ""yes"" is correct, a few more points to consider: There is no tax penalty for withdrawing any time from a taxable investment, that is, one not using specific tax protections like 401k/IRA or ESA or HSA. But you do pay tax on any income or gain distributions you receive from a taxable investment in a fund (except interest on tax-exempt aka ""municipal"" bonds),  and any net capital gains you realize when selling (or technically redeeming for non-ETF funds). Just like you do for dividends and interest and gains on non-fund taxable investments. Many funds have a sales charge or ""load"" which means you will very likely lose money if you sell quickly typically within at least several months and usually a year or more, and even some no-load funds, to discourage rapid trading that makes their management more difficult (and costly), have a ""contingent sales charge"" if you sell after less than a stated period like 3 months or 6 months.  For funds that largely or entirely invest in equities or longer term bonds, the share value/price is practically certain to fluctuate up and down, and if you sell during a ""down"" period you will lose money; if ""liquid"" means you want to take out money anytime without waiting for the market to move, you might want funds focussing on short-term bonds, especially government bonds, and ""money market"" funds which hold only very short bonds (usually duration under 90 days), which have much more stable prices (but lower returns over the longer term)." You need to report the income from any work as income, regardless of if you invest it, spend it, or put it in your mattress (ignoring tax advantaged accounts like 401ks).  You then also need to report any realized gains or losses from non-tax advantaged accounts, as well as any dividends received.  Gains and losses are realized when you actually sell, and is the difference between the price you bought for, and the price you sold for.  Gains are taxed at the capital gains rate, either short-term or long-term depending on how long you owned the stock.   The tax system is complex, and these are just the general rules.  There are lots of complications and special situations, some things are different depending on how much you make, etc.  The IRS has all of the forms and rules online.  You might also consider having a professional do you taxes the first time, just to ensure that they are done correctly.  You can then use that as an example in future years. You might be confusing two different things. An advantage of investing over a long term is the compounding of returns.  Those returns can be interest, dividends, or capital gains.  The mix between them depends on what you invest it and how you invest in it.  This advantage applies whether your investment is in a taxable brokerage account or in a tax-advantaged 401K or IRA.  So, start investing early so that you have longer for this compounding of returns to happen. The second thing is the tax deferral you get from 401(k) or IRAs.  If you invest in a ordinary taxable account, then you have to pay taxes on your interest and dividends for the year in which they occur.  You also have to pay taxes on any capital gains which you realize during the year.  These yearly tax payments are then money that you don't get the benefit of compounding on.  With 401(k) and IRAs, you don't have to pay taxes during these intermediate years. When you invest in stocks, there are two possible ways to make money: Many people speculate just on the stock price, which would result in a gain (or loss), but only once you have resold the shares. Others don't really care about the stock price. They get dividends every so often, and hopefully, the return will be better than other types of investments. If you're in there for the long run, you do not really care what the price of the stock is. It is often highly volatile, and often completely disconnected from anything, so it's not because today you have a theoretical gain (because the current stock price is higher than your buying price) that you will effectively realise that gain when you sell (need I enumerate the numerous crashes that prevented this from happening?). Returns will often be more spectacular on share resale than on dividends, but it goes both ways (you can lose a lot if you resell at the wrong time). Dividends tend to be a bit more stable, and unless the company goes bankrupt (or a few other unfortunate events), you still hold shares in the company even if the price goes down, and you could still get dividends. And you can still resell the stock on top of that! Of course, not all companies distribute dividends. In that case, you only have the hope of reselling at a higher price (or that the company will distribute dividends in the future). Welcome to the next bubble... One estimate is to sell today, estimate the taxes, and determine how much cash you need to set aside over the next 12 months. The is no way to calculate what impact dividends and capital gains the funds will have, because unlike interest they aren't guaranteed. The other complexity is that the funds themselves could drop in value. In that case the dividends and capital gains may not even be enough to get you back to even. I use mutual funds to invest over the long term, with the idea of spending the funds over decades. When needing to save for a short term goal, I use banking products. They are guaranteed not to lose value, and the interest changes are slowerand thus easier to predict. The Paragraph talks about dividends given by Mutual Funds. Say a fund has NAV of $ 10, as the value of the underlying security grows, the value of the fund would also grow, lets say it becomes $ 12 in 2 months. Now if the Mutual Fund decides to pay out a dividend of $ 1 to all unit holder, then post the distribution of dividend, the value of the Fund would become to $ 11. Thus if you are say investing on 1-April and know that dividends of $1 would be paid on 5-April [the divided distribution date is published typically weeks in advance], if you are hoping to make $1 in 5 days, that is not going to happen. On 6-April you would get $1, but the value of the fund would now be $11 from the earlier $12. This may not be wise as in some countries you would ending up paying tax on $1. Even in shares, the concept is similar, however the price may get corrected immediately and one may not actually see it going down by $1 due to market dynamics. Does my prior answer here to a slightly different question help at all? Are there capital gains taxes or dividend taxes if I invest in the U.S. stock market from outside of the country? "You have to be the owner of record before the ex-dividend date, which is not the same day as the date the dividend is paid. This also implies that if you sell on or after the ex-dividend date, you'll still get the dividend, even if you no longer own the stock.  Keep in mind, also, that the quoted price of the stock (and on any open orders that are not specifically marked as ""do not reduce"") on its ex-dividend date is dropped by the amount of the dividend, first thing in the morning before trading starts. If you happen to be the first order of the day, before market forces cause the price to move, you'll end up with zero gain, since the dividend is built into the price, and you got the same value out of it -- the dividend in cash, and the remaining value in stock. As pointed out in the comments (Thanks @Brick), you'll still get a market price for your trade, but the price reduction will have had some impact on the first trade of the day. Source: NYSE Rule 118.30 Also, remember that the dividend yield is expressed in annualized terms. So a 3% yield can only be fully realized by receiving all of the dividend payments made by the company for the year. You can, of course, forget about individual companies and just look for dividends to create your own effective yield over time. But, see the final point... Finally, if you keep buying and selling just to play games with the dividends, you're going to pay far more in transaction fees than you will earn in dividends. And, depending on your individual circumstances, you may end up paying more in capital gains taxes."