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The in-kind mechanism gets an ETF’s capital-gain distributions close to zero. It does nothing for dividends. A fund must pass at least 90% of its investment income to shareholders every year, and shareholders pay tax on it in that year, no matter how long they hold.
Why it cannot be deferred
A capital gain only exists when someone sells, and an ETF can arrange never to sell. A dividend arrives in cash whether anyone wanted it or not. Once the fund receives it, the law requires the fund to pay it out, and once it is paid out, it is income. The only relief is the rate: a dividend on stock held at least 61 days around the ex-dividend date is “qualified” and taxed at 20% federal rather than 37%.
The one product aimed at it
One fund launched in 2025 to never receive a dividend at all, by rotating between index ETFs before each ex-dividend date. It is small, new, and on Treasury’s list; it is covered with the other new products in the income-ETF topic’s last read.
What this means for the location decision
Dividends are the reason an index ETF is not quite tax-free in a taxable account, and they are the entire tax saving from moving that ETF into an IRA. Forty-six basis points is real but small, and the IRA turns the eventual long-term gain into ordinary income on the way out. The shelter is better spent on something with turnover.