Tax Effects of K1s Issued by ETFs in IRAs

by Angie Mohr, studioD

K-1 slips are a type of tax reporting form issued by some exchange-traded funds (ETFs). They are similar in nature and reporting requirements to a 1099 form. In tax-advantaged plans, such as IRAs or 401k plans, they are often not issued at all. If you do receive one for an ETF held in your IRA, you can ignore it as you do not report income or gains and losses in the plan.


IRAs are tax-advantaged retirement plans, meaning that income building in the plan is either deferred or exempted from tax. The two main types of IRAs are traditional and Roth. In a traditional IRA, contributions are tax-deductible and both contributions and income in the plan are taxable on withdrawal. In a Roth IRA, contributions are not tax-deductible, but neither the contributions or income is taxable on withdrawal. IRAs are set up and managed by financial institutions. Depending on the rules of the individual plan, you can invest in stocks, bonds, mutual funds and ETFs within the plan.

Form K-1

ETFs are similar to mutual funds, except they mimic investment returns on indexes, such as the S&P; 500, rather than a basket of individual stocks. ETFs that trade in commodity indexes usually send out a K-1 slip to investors at the end of the year rather than a 1099 form. The K-1 breaks down the income in the fund which, in indexes, often consists only of gains and losses. For investors who hold ETFs outside of tax-advantaged plans, this information is important for calculating the cost base of the securities in order to report gains and losses.

K-1 Reporting

In an IRA or other tax-advantaged retirement plans, the K-1 form, as well as any 1099 forms received, becomes irrelevant. Gains and losses on investments within a retirement plan do not require tracking or accounting because they are not taxed when earned. Most ETF administrators do not send out tax forms to investors who hold funds in retirement plans. If you receive one, contact your IRA plan administrator to get it cleared up. While you do not need to report the information on the K-1, the ETF also files the K-1 with the IRS and you could be contacted about not reporting taxable income or gains.

Taxation of Withdrawals From Your IRA

In a Roth IRA, withdrawals from the plan are not taxable ever. There is, however, a 10 percent penalty on withdrawals if they occur prior to age 59 1/2. In a traditional IRA, withdrawals are taxed without regard to whether they are contributions, interest, capital gains or dividends. All withdrawals are taxed as ordinary income. The K-1 forms that divide the income into its component parts are irrelevant because the income is all taxed the same way.

About the Author

Angie Mohr is a syndicated finance columnist who has been writing professionally since 1987. She is the author of the bestselling "Numbers 101 for Small Business" books and "Piggy Banks to Paychecks: Helping Kids Understand the Value of a Dollar." She is a chartered accountant, certified management accountant and certified public accountant with a Bachelor of Arts in economics from Wilfrid Laurier University.