Illinois Retirement Income Tax 2026: $0 State Tax on RMDs, IRAs, and Pensions

Illinois levies a flat 4.95% income tax on wages, interest, capital gains, and most other income. But the Illinois Income Tax Act carves out a complete exemption for retirement income — including all IRA distributions, 401(k) and 403(b) withdrawals, pension payments, and Social Security. A retired Illinois resident receiving $200,000 per year entirely from a traditional IRA owes $0 in Illinois state income tax. The exemption has no age floor and no income ceiling. This makes Illinois one of the most retirement-income-friendly states in the country, even though most people assume the opposite because of the state's reputation as a high-tax state.

How the exemption works: 35 ILCS 5/203

Illinois income tax starts with your federal adjusted gross income and then applies a list of subtractions before applying the 4.95% rate. Retirement income is one of those subtractions under 35 ILCS 5/203(a)(2)(F), which permits taxpayers to subtract qualifying distributions from all retirement sources: traditional IRAs (IRC §408), Roth IRAs (IRC §408A), qualified employer plans including 401(k)s, 403(b)s, and 457(b)s, pension and profit-sharing plans, and SEP and SIMPLE IRAs.¹

The subtraction has no age minimum, no income ceiling, and no dollar cap. A 45-year-old taking an early IRA distribution qualifies for the same full exemption as a 78-year-old taking RMDs. A retiree with $1 million in annual IRA distributions pays $0 Illinois income tax on every dollar — the same as one with $50,000 in distributions. Illinois taxes the income it defines as non-retirement; it simply does not define retirement account distributions as taxable income at the state level.

Roth conversions are also exempt. Because a Roth conversion is technically a traditional IRA distribution event — reported on Form 1099-R and included in federal gross income — it qualifies for the 35 ILCS 5/203 subtraction. A $200,000 Roth conversion completed as an Illinois resident triggers federal income tax at the marginal rate but $0 Illinois state income tax. Neighboring Wisconsin would charge $8,000–$11,000 in state income tax on the same conversion. This makes Illinois one of the few income-tax states where large pre-RMD Roth conversion strategies carry no state-level cost.

Illinois vs. Wisconsin retirement income tax calculator

Wisconsin is the most natural comparison for Illinois retirees near the state border — and for Midwesterners choosing between the two states for retirement. Wisconsin taxes all traditional IRA distributions and 401(k) withdrawals as ordinary income at progressive rates reaching 7.65%. There is no general retirement income exemption for private-sector accounts. Social Security is exempt in Wisconsin, but IRA and 401(k) distributions from private plans are fully taxable.

Enter your retirement income to see what each state costs.

Illinois vs. neighboring states: retirement income tax at key income levels

Approximate estimates for a single filer with no income other than IRA distributions; standard deductions applied where applicable. Wisconsin and Minnesota estimates reflect income-tax-only; property tax and estate tax comparisons are separate. Federal taxes are identical in all states.

The real tax burden in Illinois: property taxes

Illinois retirees who know about the retirement income exemption often underestimate property taxes — and this is where Illinois falls short compared to the Sun Belt states. Illinois has an average effective property tax rate of approximately 2.07%, the second highest in the nation after New Jersey.² Cook County (Chicago metro) effective rates run approximately 1.9%–2.5% depending on municipality; collar counties including Lake, DuPage, and Kane range from 1.7% to 2.4%. Downstate counties are lower — rates in the Springfield or Bloomington areas are often 1.5%–2.0%.

Estimates use statewide average effective rates before senior exemptions. Actual Illinois rates vary significantly by county and municipality. Florida estimates exclude homestead exemption (Save Our Homes applies after first year). Federal income tax is unaffected by state of residence.

Illinois senior property tax programs

Illinois offers several property tax relief programs for retirees, though the savings are modest relative to the bills that generate them:

• General Homestead Exemption: Reduces the equalized assessed value (EAV) of a primary residence by $10,000 statewide — saving approximately $200/year at a 2% effective rate.
• Senior Citizens' Homestead Exemption: For homeowners age 65+, reduces EAV by an additional $8,000 — saving approximately $160/year. Some counties supplement the state amount.
• Senior Citizens Assessment Freeze (Senior Freeze): Available to homeowners age 65+ with total household income at or below $65,000, this program freezes the EAV at a base-year assessment, preventing tax increases from home value appreciation.³ It does not reduce the existing tax bill — it prevents future increases on the frozen portion only.
• Property Tax Credit on IL return: A 5% credit on your Illinois income tax return for property taxes paid. For retirees with all-exempt retirement income (and therefore no Illinois income tax liability), this credit provides no benefit unless they also have capital gains or other non-exempt income to offset.

The combined Homestead + Senior exemptions save most Illinois retirees under $400 per year — a small offset against $8,000–$20,000+ annual property tax bills in the Chicago metro. The Senior Assessment Freeze is more valuable in high-appreciation markets for income-qualifying households.

The Illinois estate tax: $4 million exemption, no portability

Illinois imposes a separate state estate tax with a $4 million per-person exemption — not indexed for inflation and with no portability.⁴ For context, the 2026 federal estate tax exemption is $15 million per person under the OBBBA (One Big Beautiful Bill Act, July 2025). Retirees who face zero federal estate tax because they are below the $15M threshold may still face meaningful Illinois estate taxes.

A married couple with a $3.5M traditional IRA, a $700K home, and $400K in taxable accounts has a $4.6M estate. Federal estate tax: $0 (well below the $15M OBBBA threshold). Illinois estate tax: the estate exceeds the $4M exemption by $600K, generating approximately $50,000–$65,000 in Illinois estate tax at the first death. If the surviving spouse then holds a $4.6M estate at their death, another $50,000–$65,000 is owed. Proper planning — credit shelter trusts, annual gifting, Roth conversions to reduce the IRA balance — can significantly reduce this exposure.

Traditional IRAs are particularly problematic in the Illinois estate tax context: they are included in the gross estate at face value (for estate tax calculation), and heirs will also owe federal income tax on every withdrawal (the IRA has never been taxed). A $1M traditional IRA left to an adult child in the 32% federal bracket generates Illinois estate tax at the first death and then $320,000 in federal income tax as the heir drains it over 10 years. Converting to Roth before death reduces the IRA's face value (conversion taxes are paid by the owner) and eliminates the heir's income tax obligation — addressing both problems simultaneously.

→ IRA estate planning: leaving a large IRA without a tax disaster
→ Roth conversions after 73: can you convert while taking RMDs?

Strategies for Illinois retirees

1. Roth conversions cost only federal tax — $0 Illinois on top

Because Illinois exempts IRA distributions under 35 ILCS 5/203, Roth conversions are also exempt from Illinois state income tax. A $150,000 annual Roth conversion as an Illinois resident triggers federal income tax (typically $24,000–$48,000 depending on bracket and other income) but $0 in Illinois state income tax. The same conversion completed as a Wisconsin resident adds approximately $6,000–$8,000 in Wisconsin state income tax.

For Illinois retirees with estates above $4M, this creates a compounding advantage: each dollar converted reduces the traditional IRA balance (shrinking the gross estate below the Illinois estate tax threshold) at a cost that carries no Illinois state component. Converting $100,000–$200,000 per year in the 60–72 window — the pre-RMD golden window where brackets are typically at their lowest — costs only federal tax while simultaneously reducing the Illinois estate tax exposure on the remaining IRA balance.

→ Roth conversions: the 60-73 golden window
→ How much to convert each year? Sizing calculator

2. Capital gains in Illinois are taxable — plan your taxable account accordingly

Unlike Florida, Texas, and Nevada, Illinois taxes capital gains from taxable brokerage accounts at the flat 4.95% state rate. A retiree whose only income is $150,000 in annual RMDs from a traditional IRA owes $0 Illinois state income tax on those distributions. But if the same retiree also realizes $60,000 in long-term capital gains by selling appreciated securities in a taxable account, Illinois charges 4.95% on that $60,000 ($2,970). The distinction between retirement account distributions (exempt) and taxable account gains (taxable at 4.95%) matters for retirees holding both types of accounts.

Strategies: Tax-loss harvesting to offset gains; deploying taxable account spending before IRA distributions in years with large gain events; or — for retirees with large gain-exposure in taxable accounts — considering relocation before harvesting gains.

→ Capital gains tax rates in retirement: how RMDs determine your federal rate

3. QCDs: the federal tool that still fully applies

Qualified Charitable Distributions allow IRA owners age 70½+ to donate up to $111,000 directly to charity in 2026, excluded from federal gross income. Since Illinois already exempts IRA distributions from state income tax, a QCD saves no Illinois state tax (it was already $0). But the federal benefit is identical to what any retiree in any state receives: approximately $6,600–$9,900 in federal income tax savings at the 22%–33% marginal bracket on a $30,000 QCD, plus IRMAA Medicare surcharge avoidance, and reduced Social Security provisional income. Illinois retirees are not disadvantaged in their QCD economics — the math is the same as in California or New York, but without a 9%–13% state layer on top.

→ QCD calculator: federal savings + IRMAA tier impact

4. Estate planning is the priority — not income tax relocation

An Illinois retiree primarily seeking to eliminate income taxes on IRA distributions has nothing to move away from — that income is already $0 in Illinois. The financial case for relocation (to Florida, Nevada, or Texas) is driven by two factors: property taxes and the Illinois estate tax. A retiree in a $900K Naperville home paying $18,000/year in property tax vs. the same retiree in a $900K Sarasota home paying $7,500/year saves $10,500/year — $210,000 over 20 years. That is a real relocation argument. Eliminating Illinois income tax on IRA distributions is not, because those distributions are already tax-free in Illinois.

When to stay vs. when moving makes financial sense

Illinois's retirement income exemption resolves the income tax question for most retirees with IRA and pension income. The decision to move reduces to property taxes and the estate tax:

• Stay in Illinois if: Your retirement income is primarily IRA/pension/SS (exempt in Illinois), you own a modestly valued home or plan to downsize, your estate is well below $4M, and family ties or lifestyle preferences favor staying.
• Consider moving if: You own a high-value home with a large annual property tax bill, your estate (including IRA balances) will exceed $4M per spouse and you have not done sufficient estate planning, or you hold a large taxable brokerage portfolio with embedded capital gains you plan to harvest.
• Illinois vs. Wisconsin or Minnesota specifically: If your choice is between Illinois and a neighboring state for lifestyle or family reasons, Illinois wins the income tax comparison decisively — $0 vs. $5,000–$25,000+ per year on moderate-to-large IRA distributions. From a pure income tax standpoint, Illinois retirees with private-sector IRA income are better positioned than Wisconsin or Minnesota retirees at equivalent income levels.

→ Complete relocation guide: domicile change, audit risk, and timing
→ Which states tax retirement income? Full 50-state comparison
→ All-50-states retirement income tax calculator

1. 35 ILCS 5/203 — Illinois Income Tax Act, §203 (Illinois General Assembly). Subsection (a)(2)(F) provides a subtraction from federal adjusted gross income for retirement income distributions includible in gross income under the Internal Revenue Code from: IRAs under IRC §408 and §408A (Roth IRAs), qualified employer plans under IRC §401(a), §403(a), §403(b), §457(b), and amounts includible under IRC §72. The subtraction has no age minimum, no income cap, and no annual dollar limit. See also: Illinois Department of Revenue — Does Illinois tax my pension, social security, or retirement income? (IDOR confirms the complete exemption for distributions from qualified plans and IRAs, including early distributions, inherited IRA distributions, and Roth distributions.)
2. Tax Foundation — Illinois Tax Rates & Rankings 2026. Illinois effective property tax rate approximately 1.88%–2.07% of home value, second highest nationally behind New Jersey. Significant county variation: Cook County (Chicago metro) effective rates approximately 1.9%–2.5%; Lake, DuPage, and Kane collar counties approximately 1.7%–2.4%; downstate counties generally lower. Property is locally assessed and rates are set by taxing districts; there is no statewide uniform rate.
3. Illinois Department of Revenue — Property Tax Programs. The Senior Citizens Assessment Freeze Homestead Exemption is available to homeowners age 65+ with total household income at or below $65,000. The freeze applies to the equalized assessed value, preventing the portion of assessed value above the base-year EAV from increasing the property tax bill. The General Homestead Exemption reduces EAV by $10,000; the Senior Citizens' Homestead Exemption reduces EAV by an additional $8,000. Contact your county assessor's office to apply — the freeze requires annual renewal.
4. Illinois Attorney General — Illinois Estate Tax Fact Sheet. Illinois estate tax exemption is $4,000,000 per person and is not indexed for inflation. Illinois does not offer portability — the unused exemption of a deceased spouse cannot be transferred to the surviving spouse (unlike federal portability under IRC §2010(c)). Marginal estate tax rates begin at 0.8% on the first taxable million above the exemption and reach 16% on amounts above approximately $10M. Illinois estate tax applies to all Illinois residents and to non-residents with Illinois-sited property. As of June 2026, HB2601 (which would raise the exemption to $8M) has not been enacted; the $4M threshold remains in effect.
5. IRS Rev. Proc. 2025-32 — 2026 Federal Tax Inflation Adjustments. 2026 federal income tax brackets, standard deductions, long-term capital gains thresholds, and related values. Illinois retirees are subject to the same federal income tax rules as taxpayers in all states. Federal capital gains rates (0%/15%/20%) apply to gains from taxable accounts; Illinois charges an additional 4.95% on those same gains at the state level. IRA distributions that are exempt from Illinois income tax are still fully taxable at federal rates.

Illinois retirement income exemption verified against 35 ILCS 5/203 and Illinois Department of Revenue published guidance (June 2026). Property tax rates per Tax Foundation 2026 state rankings (approximately 2.07% statewide effective rate). Illinois estate tax ($4M exemption, no portability, rates to 16%) per Illinois Attorney General fact sheet and the Illinois Estate and Generation-Skipping Transfer Tax Act; HB2601 ($8M proposal) not enacted as of June 2026. Wisconsin comparison brackets approximate based on 2026 Wisconsin DOR schedule. Federal values per IRS Rev. Proc. 2025-32.