Illinois Taxes on Pensions, IRAs, and 401(k)s

If you’re retired or planning to retire in Illinois, one of the biggest questions is how your retirement income will be taxed.

The good news is that Illinois is considered one of the more tax-friendly states for retirees.

Illinois tax rules are administered by the Illinois Department of Revenue.

This guide explains how pensions, IRAs, and 401(k) withdrawals are treated for Illinois state income tax purposes.

Does Illinois Tax Retirement Income?

Illinois does not tax most retirement income.

That includes:

• Public and private pensions
• Traditional IRA distributions
• 401(k) withdrawals
• Social Security benefits

Illinois is one of the few states that fully exempts qualifying retirement income from state income tax.

Example: If you receive $45,000 per year from a pension and $20,000 from a traditional IRA, Illinois generally does not tax that income at the state level.

Illinois State Income Tax Overview

Illinois uses a flat income tax system.

The state income tax rate is 4.95%.

However, retirement income that qualifies for exemption is not included in Illinois taxable income.

This makes Illinois especially attractive for retirees who rely heavily on pension or retirement account withdrawals.

Pensions in Illinois

Illinois does not tax:

• Government pensions
• Private employer pensions
• Railroad Retirement benefits

Both lump-sum and periodic payments are generally exempt, as long as they qualify as retirement income.

Example: A retired teacher receiving $60,000 from a state pension does not owe Illinois income tax on those payments.

Traditional IRAs and 401(k) Withdrawals

Illinois does not tax distributions from:

• Traditional IRAs
• 401(k) plans
• 403(b) plans
• 457 plans

This applies whether withdrawals are:

• Regular retirement withdrawals
• Required minimum distributions (RMDs)

Example: If you withdraw $30,000 from your 401(k) to meet RMD requirements, Illinois does not tax that amount at the state level.

Roth IRA Withdrawals

Qualified Roth IRA withdrawals are tax-free federally and also not taxed by Illinois.

If a Roth withdrawal is taxable at the federal level (such as early or non-qualified withdrawals), Illinois generally follows federal treatment unless it qualifies as a retirement income exclusion.

Social Security Benefits

Illinois does not tax Social Security benefits.

This provides additional tax relief for retirees compared to states that partially tax Social Security income.

What Does Illinois Tax?

While retirement income is exempt, Illinois does tax:

• Wages
• Business income
• Rental income
• Interest and dividends

If you are working part-time in retirement, that earned income is subject to the 4.95% flat tax rate.

Example: If you earn $20,000 from part-time work in retirement, that income is taxable even though your pension is not.

Important Requirements

To qualify for the retirement income subtraction, the income must meet Illinois’ definition of retirement income.

It generally must come from:

• A qualified employee benefit plan
• An individual retirement account
• An eligible deferred compensation plan

Non-qualified distributions may not receive the same treatment.

Is Illinois Tax-Friendly for Retirees?

From an income tax standpoint, Illinois is highly tax-friendly for retirees because it:

• Fully exempts most retirement income
• Does not tax Social Security
• Uses a flat income tax system

However, retirees should also consider property taxes and the cost of living when evaluating the overall tax burden.

💻 Filing Recommendation

When filing your Illinois return, tax software automatically subtracts qualifying retirement income from taxable income if entered correctly.

Benefits of e-filing include:

• Automatic retirement income subtraction
• Reduced errors
• Faster processing
• Direct deposit for refunds

Understanding how Illinois treats pensions, IRAs, and 401(k)s can help retirees keep more of their income and plan withdrawals more efficiently.