The "arms race" relationship between transposable elements (TEs) and their host has promoted a series of epigenetic silencing mechanisms directed against TEs. Retrotransposons, a class of TEs, are often located in repressed regions and are thought to induce heterochromatin formation and spreading. However, direct evidence for TE-induced local heterochromatin in mammals is surprisingly scarce. To examine this phenomenon, we chose two mouse embryonic stem (ES) cell lines that possess insertionally polymorphic retrotransposons (IAP, ETn/MusD, and LINE elements) at specific loci in one cell line but not the other. Employing ChIP-seq data for these cell lines, we show that IAP elements robustly induce H3K9me3 and H4K20me3 marks in flanking genomic DNA. In contrast, such heterochromatin is not induced by LINE copies and only by a minority of polymorphic ETn/MusD copies. DNA methylation is independent of the presence of IAP copies, since it is present in flanking regions of both full and empty sites. Finally, such spreading into genes appears to be rare, since the transcriptional start sites of very few genes are less than one Kb from an IAP. However, the B3galtl gene is subject to transcriptional silencing via IAP-induced heterochromatin. Hence, although rare, IAP-induced local heterochromatin spreading into nearby genes may influence expression and, in turn, host fitness.