Illinois Taxes on Pensions IRAs and 401ks – Illinois stands out as one of the most retiree-friendly states in the U.S. when it comes to taxing retirement income. The state does not impose income tax on pensions, traditional IRA withdrawals, Roth IRA distributions, or 401(k) withdrawals for residents. This full exemption applies even though Illinois has a flat state income tax rate of 4.95%.
Federal taxes still apply to most traditional retirement account distributions, but at the state level, Illinois allows you to subtract (fully exempt) the federally taxable portions of these incomes. This makes Illinois one of only a handful of states with no tax on retirement income from these sources.
Whether you’re an Illinois resident planning retirement, a snowbird considering a move, or already receiving distributions, this guide breaks down exactly how Illinois taxes (or doesn’t tax) pensions, IRAs, and 401(k)s in 2026.
Overview of Illinois Retirement Income Taxation
Illinois taxes most earned income at a flat 4.95% rate but provides a generous subtraction for retirement income on Form IL-1040. You subtract the federally taxed portion of qualifying retirement income directly on Line 5 of the IL-1040 (or via Schedule M in certain cases).
This subtraction covers:
- Pensions from qualified plans (public or private)
- IRA distributions (traditional and certain Roth conversions)
- 401(k), 403(b), and similar employer plans
- Government and military retirement pay
- Railroad retirement and Social Security benefits
Result: Most retirees with no other significant income pay zero Illinois state income tax on their retirement savings.
Do You Pay State Taxes on Pensions in Illinois?
No. Illinois does not tax pension income from qualified employee benefit plans. This includes both private-sector pensions and public/government pensions (including military).
The state exempts the federally taxable amount reported on your federal Form 1040 or 1040-SR (typically Line 5b). Early pension distributions qualify for the subtraction as well, though federal penalties may still apply.
Key note: Only income from qualified plans (under IRC Sections 402–408) qualifies. Non-qualified deferred compensation plans generally do not. Always check with your plan administrator if unsure.
Illinois Tax Rules for IRA Withdrawals and Conversions
Traditional IRA withdrawals and SEP IRA distributions are fully exempt from Illinois state income tax. The federally taxable portion (reported on federal Line 4b) is subtracted on your IL-1040.
Roth IRA conversions from traditional IRAs are also covered: the taxable conversion amount is subtracted at the state level. Qualified Roth IRA distributions (tax-free federally after age 59½ and 5-year rule) require no subtraction because they are not federally taxed.
Illinois treats IRAs favorably regardless of whether you take required minimum distributions (RMDs) or make early withdrawals (subject to federal 10% penalty if under 59½).
Are 401(k) Distributions Taxed by Illinois?
No state tax applies. 401(k) withdrawals, including those from 403(b) and governmental 457 plans, are fully exempt in Illinois. The state subtracts the federally taxable amount reported on your federal return (Line 5b).
This includes:
- Regular distributions
- Lump-sum distributions
- Rollovers (if taxable federally)
Like pensions and IRAs, early 401(k) withdrawals remain exempt from Illinois tax, though federal rules and penalties still govern.
Federal vs. Illinois Taxes on Retirement Accounts: Key Differences
| Retirement Account | Federal Tax Treatment (2026) | Illinois State Tax Treatment |
|---|---|---|
| Traditional IRA / 401(k) / Pension | Taxed as ordinary income | Fully exempt (subtracted on IL-1040 Line 5) |
| Roth IRA (qualified distributions) | Tax-free | Tax-free (no subtraction needed) |
| Roth conversions | Taxed in year of conversion | Exempt at state level |
| Social Security | Up to 85% taxable federally | Fully exempt |
| Early withdrawals (under 59½) | Taxed + 10% penalty | Still fully exempt from state tax |
Federal rules always come first. Illinois simply removes the state tax burden on top.
How to Claim the Retirement Income Subtraction on Your Illinois Tax Return?
- Report all retirement income on your federal Form 1040/1040-SR.
- On Illinois Form IL-1040, enter the federally taxable amounts on Line 5 (Social Security and certain retirement plans subtraction).
- Attach supporting documents: federal return pages 1–2, and Form 1099-R or SSA-1099 if the income isn’t clearly identified on the federal return.
Some retirement partner payments or K-1 income may require Schedule M instead. Use the official IL-1040 instructions or Publication 120 (revised December 2025) for your exact filing year.
Pro tip: Illinois does not require withholding on retirement income, but you can voluntarily request it via Form IL-W-4P if you want to prepay any potential tax.
Special Considerations for Early Withdrawals, Roth IRAs, and Inherited Accounts
- Early withdrawals: Illinois still grants the full subtraction. Federal 10% penalty and income tax apply as usual.
- Inherited IRAs/401(k)s: Beneficiary distributions from qualified plans generally qualify for the Illinois subtraction.
- Roth IRAs: Once qualified, distributions are never taxed in Illinois (or federally).
Non-residents receiving Illinois-source retirement income may face different rules—consult a tax professional if you have multi-state residency.
Additional Illinois Tax Benefits for Retirees Age 65 and Older
Illinois offers seniors (65+) an extra personal exemption amount on top of the standard exemption. While the retirement income subtraction already eliminates tax on pensions/IRAs/401(k)s, this extra exemption helps reduce tax on any other income (part-time work, taxable investments, etc.).
Illinois also fully exempts Social Security, military retirement pay, and railroad retirement benefits.
Common Mistakes to Avoid When Filing Illinois Retirement Taxes
- Forgetting to attach federal Form 1040 pages or 1099-R forms
- Subtracting the gross distribution instead of only the federally taxable portion
- Assuming all annuity or deferred compensation income qualifies (only qualified plans do)
- Not updating withholding if you have other taxable Illinois income
Is Illinois Changing Its Retirement Tax Policy? Latest Updates for 2026
As of April 2026, Illinois continues to fully exempt pensions, IRAs, and 401(k) distributions. Proposals for a progressive income tax structure have been introduced but have not passed, and voters previously rejected similar measures. No law currently taxes retirement income in Illinois.
Always verify with the latest IL-1040 instructions each tax season, as rules can evolve.
Why Illinois Remains a Top Retirement Tax Destination?
Illinois offers one of the strongest retirement tax advantages in the nation: no state tax on Social Security, pensions, IRA withdrawals, or 401(k) distributions. Combined with the flat 4.95% rate on other income, this structure helps retirees keep more of their hard-earned savings.
Important disclaimer: Tax rules are complex and individual circumstances vary. This article is for informational purposes only and is not tax advice. Consult a qualified tax professional or the Illinois Department of Revenue for personalized guidance. Official resources include Publication 120 (Retirement Income) and tax.illinois.gov.
For the most current forms and instructions, visit the Illinois Department of Revenue website directly. Planning ahead with a tax advisor can help you maximize these benefits in 2026 and beyond.