Illinois doesn't tax retirement income. Social Security benefits, pension and annuity income, IRA distributions, 401(k) withdrawals, and military retirement pay are all completely exempt from Illinois income tax. Illinois imposes a flat 4.95% income tax on earned income (wages, self-employment), but retirement account distributions are excluded entirely. This makes Illinois significantly more favorable for retirees than many neighboring states that partially or fully tax these same income sources.
For Illinois retirees drawing income from a mix of Social Security, traditional IRA withdrawals, and investment accounts, the state income tax burden is effectively zero on the retirement income components. A couple drawing $80,000 from Social Security and $60,000 from a traditional IRA pays $0 in Illinois state income tax on those $140,000. This is a genuine financial advantage that's frequently underweighted when comparing Illinois to Florida, Texas, or other no-income-tax states.
The income that IS taxed in Illinois at the flat 4.95% rate includes: wages or self-employment income (if you work in retirement), taxable interest and dividends from non-retirement accounts, and capital gains from investment sales. Most retirees have limited earned income, which means the 4.95% rate applies only to their investment income, often a fraction of their total retirement income.
Where Illinois hurts retirees isn't in income tax but in property taxes and the Illinois estate tax. Cook County property taxes are among the highest in the nation. The Illinois estate tax has a low $4 million exemption with no portability between spouses. These two costs are the dominant financial challenges for Northern Suburbs retirees, not the state income tax structure, which is actually favorable.
When evaluating whether to retire in Illinois versus relocating to a lower-property-tax, no-income-tax state like Florida or Tennessee, it's important to compare the total tax burden, not just the headline income tax rate. Illinois's 4.95% on earned income is largely irrelevant for retirees who have no earned income, while the property tax comparison between an Illinois suburb and a comparable Florida community is often $10,000-$25,000 per year in Illinois's favor for the retiree who doesn't own a high-value home.
Key facts
- Illinois exempts from state income tax: Social Security, pension income, annuity income, IRA distributions, 401(k) withdrawals, Roth IRA distributions, military retirement pay
- Illinois flat income tax rate: 4.95%, applies to earned income and investment income from non-retirement accounts
- Illinois capital gains: taxed as ordinary income at 4.95%, no separate lower capital gains rate
- Wisconsin taxes Social Security and pension income partially; Minnesota taxes Social Security above certain thresholds. Illinois is more favorable than both for most retirees
- Illinois estate tax: $4 million exemption per person, a significant concern for wealthier Northern Suburbs families
- Illinois has no inheritance tax (unlike Iowa or Kentucky)
Do I pay Illinois income tax on Roth IRA withdrawals?
No. Roth IRA qualified distributions are exempt from Illinois income tax, just as traditional IRA withdrawals are. Illinois doesn't distinguish between Roth and traditional retirement account distributions for state tax purposes, both are fully exempt. This makes the Roth conversion strategy even more attractive for Illinois retirees: you pay Illinois income tax on the conversion amount in the conversion year, but never again on that money.
Is it worth moving to Florida to avoid Illinois taxes in retirement?
It depends on your full picture. Florida has no income tax and lower property taxes on typical retirement homes, but the comparison is more nuanced than it appears. If you own a $500,000 Northern Suburbs home, your Illinois property taxes might be $12,000/year; a comparable Florida home might carry $4,000-$6,000. That's $6,000-$8,000 in annual savings, real money over 20 years, but not as dramatic as the income tax narrative suggests for retirees whose income is all from retirement accounts (which Illinois doesn't tax anyway). The non-financial costs of leaving, proximity to family, established healthcare relationships, community, are also real and personal.
