As a layman who has done a lot of research, I have 3 pieces of advice for people investing their 401k/IRA: 1) No Load Index Funds. 2) No Load Index Funds. 3) No Load Index Funds. Seriously people. If your fund selection is so poor in your company's 401k that they don't have a single No Load Index Fund, lobby your HR to get one added, and put your money in the lowest load Index Fund, and put only the very minimum in t…
When you buy an index fund, you get a 1099 and pay capital gains taxes on any profits the fund takes any time it trades; also when you buy it you buy into the fund's tax basis, so if they bought all their stocks lower than where they are now, you would pay capital gains taxes based on where the fund bought them instead of from the price when you bought the fund. You might even take a capital loss and still have paid capital gains taxes.
see for instance http://etf.about.com/od/etftaxes/a/ETF_Tax_Benefit.htm