Illinois does not tax most retirement income. If you live in Illinois, your Social Security benefits, your pension, and what you withdraw from an IRA or a 401(k) are subtracted from your income before the state figures its tax.1 Illinois does tax the rest of your income at one flat rate. That includes wages, interest, dividends, capital gains and rent.2
People ask whether Illinois taxes retirement income because the answer is part of what a retirement here costs. This page goes through each kind of income, then what Illinois does tax, the rate, and the other Illinois taxes a retiree still pays. It is about a person who lives in Illinois all year. The federal income tax is separate, and it still applies to most of this income.
Does Illinois tax Social Security?
No. The Illinois income tax starts from the income on your federal return. It then subtracts all the Social Security benefits that were included there. Railroad Retirement benefits are subtracted the same way.3
Your federal return is different. The federal government can tax up to 85% of your Social Security benefits, depending on your other income.3 Our Social Security taxation calculator shows how much of your benefits is taxed federally.
Does Illinois tax pensions?
Generally no. Illinois subtracts the federally taxed part of what you receive from these plans:4
- A qualified employee benefit plan, which is the kind of plan most employer pensions are
- A government retirement plan or government disability plan, including military plans
- A state or local government deferred compensation plan
- Railroad Retirement
If you are not sure whether your pension comes from a qualified plan, the Department of Revenue says to check with your employer.4
One kind of pay that feels like a pension is not subtracted. Deferred pay from a private employer's plan that is not a qualified plan is taxed by Illinois. So is third-party sick pay.5
Does Illinois tax 401(k) withdrawals and IRA distributions?
No. Illinois subtracts the federally taxed part of what you take from a 401(k), an IRA or a SEP plan.1 The subtraction covers required minimum distributions, because they are withdrawals from these accounts. It also covers early withdrawals. The federal 10% additional tax on most withdrawals before 59½ is a federal tax, and Illinois does not change it.6
- Social Security benefits
- Not taxed
- Pension from an employer's qualified plan
- Not taxed
- 401(k) and similar plan withdrawals
- Not taxed
- IRA and SEP withdrawals
- Not taxed
- A conversion to a Roth IRA
- Not taxed
- Government and military retirement pay
- Not taxed
- Railroad Retirement
- Not taxed
- Wages from work
- Taxed at 4.95%
- Interest, dividends and capital gains outside retirement accounts
- Taxed at 4.95%
- Rental income
- Taxed at 4.95%
- Deferred pay from a private plan that is not qualified
- Taxed at 4.95%
Does Illinois tax a Roth conversion or an inherited IRA?
A Roth conversion is not taxed by Illinois. When you move money from a traditional IRA to a Roth IRA, the pre-tax amount is income on your federal return. The Department of Revenue lists IRA income "including amounts rolled over to a Roth IRA" among the income you may subtract.6 The federal tax on the conversion is the cost to weigh. What is a Roth conversion? explains it.
Withdrawals from an IRA you inherited are generally treated the same way. Illinois describes the subtraction by the kind of income and the line of the federal return it is on. It does not limit the subtraction to the person who first owned the account.6 What is an inherited IRA? covers the federal rules for emptying one.
What retirement income does Illinois tax?
Illinois taxes whatever is on your federal return and is not subtracted.2 For most retirees that is:
- Wages, if you still work
- Interest and dividends from savings and investments outside retirement accounts
- Capital gains from selling investments or property outside retirement accounts
- Rental income and business income
The Department of Revenue also names retirement-related income you may not subtract. It is income that is not from a qualified employee benefit plan, such as third-party sick pay and pay from deferred compensation and disability plans that are not government plans. It also includes a lump sum from a qualified plan if you chose the special ten-year averaging method for it on your federal return.5
Where your savings are held matters for this reason. The same dollar of investment income is taxed by Illinois in an ordinary account and is not taxed by Illinois when it comes out of an IRA or a 401(k).
What is the Illinois income tax rate?
Illinois taxes individual income at a flat 4.95% of net income.2 Net income is what is left after the retirement income subtraction and your exemptions. For 2026 the exemption is $2,925 for each person on the return, and each person 65 or older has $1,000 more. Illinois allows no exemption when income is above $250,000, or $500,000 on a joint return.7
Here is a hypothetical example. Suppose you and your spouse are both over 65. In the example you have $100,000 of Social Security and IRA withdrawals, and $20,000 of interest and dividends.
- Illinois subtracts the $100,000 of retirement income.
- From the $20,000 that is left, you take off $7,850 of exemptions. That is $2,925 for each of you plus $1,000 for each of you.
- The tax is 4.95% of the remaining $12,150, which is about $601.
If Illinois taxed retirement income the way it taxes wages, the tax in the example would be about $5,551. The subtraction is worth $4,950 a year to this household.7
Our Illinois retirement income tax calculator does this for your own income and shows the law behind each line.
Is your retirement income still taxed by the federal government?
Yes. The Illinois subtraction changes your Illinois return only. On your federal return, withdrawals from a traditional IRA or a 401(k) are generally taxed at your regular income tax rate, and part of your Social Security can be taxed too.8
Because Illinois subtracts this income, the federal tax is generally the only income tax on it. Our guide to RMDs explains the withdrawals the federal law requires, and Can you avoid taxes on RMDs? shows how much federal tax they can add.
What other taxes does a retiree pay in Illinois?
The income tax is one of several Illinois taxes. Two others matter most in retirement.
Property tax. If you own your home, you pay property tax to your county and local governments. Illinois law has a homestead exemption for owners 65 or older and an assessment freeze for owners 65 or older under an income limit.9 Our Illinois senior property tax exemptions calculator shows what they are worth where you live.
Estate tax. Illinois taxes estates above $4,000,000, and the tax is paid by the estate before your heirs receive anything.10 Our guide to the Illinois estate tax explains who pays it.
So Illinois taxes little of a retiree's income. A home is still taxed locally each year, and a larger estate is taxed by the state at death. A decision about where to retire takes all of these together. Our cost of living estimator compares two places with your own income.
What goes wrong with Illinois taxes in retirement?
These are the mistakes we see most often.
People assume Illinois taxes their pension or IRA withdrawals because it has an income tax, and plan a move to save a tax they do not pay.
People count the Illinois income tax when they compare states and leave out property tax and the estate tax, which are the larger Illinois costs for many retirees.
People keep most of their savings in ordinary accounts and are surprised that Illinois taxes the interest, dividends and gains.
People have Illinois tax withheld from a pension or IRA withdrawal that Illinois does not tax, and wait for a refund each year.
People forget the subtraction on the Illinois return, or the preparer misses a line, and pay tax on retirement income.
People treat deferred pay from a private employer's nonqualified plan as a pension and do not expect Illinois to tax it.
People move to a state with no income tax and find the federal tax on their withdrawals is exactly what it was.
Which calculator answers your question?
- What does Illinois tax on your retirement income? Illinois retirement income tax calculator
- How much of your Social Security is taxed federally? Social Security taxation calculator
- What are the senior property tax exemptions worth in your county? Illinois senior property tax exemptions
- What does an extra withdrawal cost in federal tax? Real marginal rate calculator
- What would Illinois tax on your estate? Illinois estate tax calculator
- What would your income cover in another place? Cost of living estimator by ZIP code
- Is a monthly pension or a lump sum worth more? Pension or lump sum?
Where we fit in. We integrate tax considerations into your investment strategy and collaborate with estate attorneys and CPAs to ensure your plan is coordinated. We are not a law firm or accounting firm, so we do not provide legal or tax advice. Everything in this material is for educational purposes, based on primary sources. Before taking any action, please consult the appropriate professionals to apply these ideas to your situation.
What Illinois leaves alone is one part of the picture. The federal tax, your home and your estate are the others. If you would like to look at all of them together with someone, we are glad to have that conversation.
