Most current land models approximate terrestrial hydrological processes as one‐dimensional vertical flow, neglecting lateral water movement from ridges to valleys. Such lateral flow is fundamental at catchment scales and becomes crucial for finer‐scale land models. To test the effect of incorporating lateral flow toward three‐dimensional representations of hydrological processes in the next generation land models, we integrate a water tracer model into the WRF‐Hydro framework to track water movement from precipitation to discharge and evapotranspiration. This hydrologic‐tracer integrated system allows us to identify the key mechanisms by which lateral flow affects the flow paths and transit times in WRF‐Hydro. By comparing modeling experiments with and without lateral routing in two contrasting catchments, we determine the impacts of lateral flow on the transit times of precipitation event‐water. Results show that with limited hydrologic connectivity, lateral flow extends the transit times by reducing (increasing) event‐water drainage loss (accumulation) in ridges (valleys) and allowing reinfiltration of infiltration‐excess flow, which is missing in most land models. On the contrary with high hydrologic connectivity, lateral flow can effectively accelerate the water release to streams and reduce the transit time. However, the transit times are substantially underestimated by the model compared with isotope‐derived estimates, indicating model limitations in representing flow paths and transit times. This study provides some insights on the fundamental differences in terrestrial hydrology simulated by land models with and without lateral flow representation.