How Illinois Taxes Social Security, Pensions, IRAs, and Other Retirement Income
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How Illinois Taxes Social Security, Pensions, IRAs, and Other Retirement Income
Key Takeaways:
- Illinois doesn't tax most retirement income. Social Security, pensions, and money you take out of a 401(k) or IRA are all tax-free in Illinois. That is not true in most states.
- There is no age or income limit on this break. It doesn't matter if you're 60 or 80, or whether you saved a little or a lot. Illinois leaves your retirement income alone either way.
- The trade-off is property and sales taxes. Illinois still taxes money from a job and from regular investments, and its property and sales taxes are among the highest anywhere. So Illinois is easy on your retirement income, but not on the costs around it.
Most people want to stay put as they get older. In a national survey by AARP, 75% of adults age 50 and older said they want to stay in their current home as they age, and 73% want to stay in their community, even though almost half worry they may have to move someday because of rising costs like taxes.1
If you live in Illinois, that worry may be smaller than you think. Illinois has a reputation as a high-tax state, and its property and sales taxes really are high. But when it comes to the money you live on in retirement, Illinois is one of the friendliest states in the country, because it doesn’t tax most of that money at all. This guide breaks down what Illinois taxes and what it leaves alone.
Illinois Social Security and Other Retirement Income Tax Rules at a Glance
Illinois handles retirement income with something called a subtraction. In plain terms, the state looks at your income, then lets you subtract your retirement money before it calculates your tax.2 So most of your retirement income never gets taxed.
- Social Security: Illinois doesn't tax your Social Security checks.
- Pensions: A pension is a monthly retirement check some employers pay. Illinois doesn't tax it, whether it comes from a government job, a private company, the military, or the railroad.
- 401(k)s, 403(b)s, and 457 plans: These are retirement accounts you save in through work. When you take money out, Illinois doesn't tax it.
- Traditional and Roth IRAs: An IRA is a retirement account you set up on your own. Illinois doesn't tax money you take out. The state even skips the tax when you move money from a regular IRA into a Roth IRA, a step called a Roth conversion, even though the federal government does tax that move.
- No age or income limit: Many states give this break only to people over a certain age, or only up to a certain income. Illinois has no such limits. The break works the same whether you have a little or a lot.
Which Illinois Retirement Taxes Still Apply to Retirees?
For retirees, a few things still get taxed. Money you earn from a part-time job or a business is taxed. So is money your investments make outside a retirement account, like interest, dividends (payments some stocks send you), and capital gains (the profit when you sell an investment for more than you paid). One thing surprises people: if you bought an annuity on your own, outside a work plan or IRA, the earnings on it can be taxed too. An annuity is a contract, usually with an insurance company, that pays you money over time.
Illinois also has other taxes that don’t touch your retirement income but still cost you. Its property taxes are among the highest in the country, and its sales tax is steep too.3 Illinois also has an estate tax, which is a tax on the money and property you leave behind when you die. It can apply to estates worth more than $4 million, a much lower cutoff than the federal one.4None of these taxes hit your retirement income directly, but they add to what living in Illinois costs.
How Property Taxes and Moving Affect the Full Illinois Tax Picture
Because Illinois treats different taxes so differently, your full picture depends on more than the retirement-income break. Property taxes, and where you choose to live, can change the math a lot.
Plan for Property Taxes and Senior Discounts
For most Illinois retirees, property taxes are the biggest state cost, and unlike income tax, they don’t go away when you retire. The good news is that Illinois offers ways for older homeowners to lower their bill. One is a senior homestead exemption, which lowers the value of your home that gets taxed. Another is an assessment freeze, which locks in that value so your bill doesn’t keep climbing if your income qualifies you. You usually have to apply, and rules differ by county.
High property taxes also matter on your federal taxes, through something called the SALT deduction. SALT stands for “state and local tax.” It is a federal rule that limits how much of your state and local taxes you can subtract on your federal return. Because Illinois property taxes are so high, this cap affects more people here than in low-tax states.
The Phase-Out: Who Doesn’t Get the Full Benefit
While the expanded SALT cap is generous, it is not unlimited.
For higher-income households, the deduction begins to phase out once modified adjusted gross income exceeds approximately $505,000 in 2026. The cap is reduced by 30% of the excess income above that threshold, but it will not drop below $10,000. For example, a married couple with $600,000 in MAGI, including any foreign-earned income, could see their SALT deduction effectively reduced back to $10,000, eliminating the benefit of the increased cap.
That said, even if your income is near or above the threshold, planning opportunities still exist. Strategies such as Roth conversions, timing withdrawals, or increasing charitable contributions may help reduce your taxable income and bring you within a more favorable range. This is where coordinated tax planning becomes particularly valuable.
Compare the Whole Picture Before You Move In or Out
Because Illinois is so easy on retirement income, some retirees assume a state with no income tax would always be cheaper. That is not always true. Illinois already doesn’t tax your retirement income, so moving to a no-income-tax state might save you little on that income, while you could end up paying more in other ways.
It works the other way too. If you’re thinking about moving to Illinois, the retirement-income break is a genuine reason to consider it, but you would want to weigh it against the high property and sales taxes you’d take on. The smart move is to look at your whole tax picture, income, property, sales, and estate, instead of just one piece.
How Illinois Taxes Retirement Income FAQs
1. What income is not taxed in Illinois?
Illinois skips the tax on almost all retirement income: Social Security, pensions, military and railroad retirement, and money you take out of a 401(k), 403(b), 457 plan, or IRA. It even skips the tax when you move money from a regular IRA into a Roth. What still gets taxed is non-retirement money, like pay from a job, business income, and money your investments earn in a regular account.
2. Is Illinois a good state for retirees?
On income tax, it’s one of the best, because it leaves almost all retirement income alone, with no age or income limit. The downside is its property and sales taxes, which are among the highest in the country, plus an estate tax with a low cutoff. Whether Illinois is a good fit depends on how your income compares to those other costs.
3. Does Illinois tax Social Security benefits?
No. Illinois does not tax Social Security at all. None of your Social Security checks are subject to Illinois income tax.
4. Does Illinois tax pensions, 401(k) money, and IRA withdrawals?
No, as long as they come from real retirement plans. Pensions, 401(k) and 403(b) money, and traditional IRA withdrawals are all left out of your Illinois taxable income. This is true no matter your age or how much you make, which makes Illinois unusually generous.
5. Are Roth IRA withdrawals and Roth conversions taxed in Illinois?
Neither one is taxed by Illinois. Money you take out of a Roth is already tax-free on your federal return, so there is nothing for Illinois to tax. And when you move money from a regular IRA into a Roth, called a Roth conversion, the federal government taxes that move, but Illinois does not.
6. Does Illinois tax capital gains, dividends, and interest in retirement?
Yes, when they come from a regular, non-retirement account. Illinois taxes interest, dividends, and capital gains at its flat 4.95% rate, the same as other non-retirement money. But money your investments earn inside a retirement account isn’t taxed until you take it out, and those withdrawals are tax-free. So it’s only the investment income in a regular account that gets taxed.
Get Help Making the Most of Illinois's Retirement Tax Rules
Illinois gives retirees something rare: almost all of your retirement income comes to you with no state income tax, and there’s no age or income limit on it. The catch is the high property, sales, and estate taxes around it. So the smartest plan uses the income-tax break while keeping an eye on those other costs.
That’s the kind of planning we do with Illinois retirees at Goldstone. Because we’re based in Illinois, our planning process takes Illinois tax considerations into account. We can help you evaluate how different income sources and planning strategies, including Roth conversions, may fit into your broader retirement plan, in coordination with your tax professional as appropriate.
From there, we can tie those tax details to the rest of your plan, from how you take out your money to your property taxes and what you leave behind. If you’d like help making the most of Illinois’s retirement tax rules, schedule a complimentary retirement review with our team.
Resources:
- AARP: 2024 Home and Community Preferences Survey
- Illinois Department of Revenue: Does Illinois Tax My Pension, Social Security, or Retirement Income?
- Tax Foundation: Illinois Tax Rates and Rankings
- Illinois Attorney General: Estate Tax
Disclosure:
Goldstone Financial Group, LLC (“GFG”) is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. This material is provided for informational and educational purposes only. The opinions expressed herein are those of GFG as of the date of publication and are subject to change without notice.
Nothing contained in this material is intended to constitute personalized investment, tax, legal, or insurance advice, or an offer to sell or a solicitation of an offer to buy any security or insurance product. The information presented should not be relied upon as the sole basis for any financial decision and is not intended to address the particular needs, circumstances, or objectives of any individual. Individuals should consult with appropriate financial, tax, legal, or other professionals regarding their specific circumstances.