Does Illinois Tax Retirement Income? 2026 Rules & Estate Cliff

2026 edition · statute-cited · part of Clear Money Guide’s 51-state retirement tax series. This guide covers state taxes on retirement income and estate transfers; property and sales taxes vary by county and are outside its scope.

Updated July 24, 2026. Quick answer: no — Illinois is one of the few states that exempts all federally-taxed retirement income: 401(k), 403(b) and 457 distributions, traditional IRA withdrawals (including Roth conversions), private and government pensions, railroad retirement, and Social Security (35 ILCS 5/203(a)(2)(F); IDOR Publication 120). The two catches: the flat 4.95% still applies to non-retirement income like interest, dividends and capital gains — and Illinois levies an estate tax with a $4,000,000 cliff that most guides describe wrong.

How Illinois taxes retirees (statute-cited)

Retirement income (401(k)/IRA/pension/SS/Roth conversions)	Not taxed — fully subtracted (35 ILCS 5/203(a)(2)(F); IL-1040 Line 5; IDOR Pub. 120)
Military retirement	Not taxed (within the general subtraction)
Everything else (interest, dividends, capital gains, wages)	Flat 4.95%
Inheritance tax	None — Illinois’ death tax is an estate tax; guides conflating the two are wrong

Worked example: a retiree drawing $80,000 from a 401(k) plus Social Security owes Illinois $0 income tax. Add $20,000 of taxable brokerage dividends and the bill is $990 — 4.95% on the dividends only. Sequencing withdrawals from retirement accounts versus taxable accounts is the whole Illinois income-tax game.

The $4 million estate cliff (described correctly)

Illinois’ $4,000,000 exclusion is not a true exemption: once a taxable estate exceeds $4M, tax is computed on the full taxable estate using the pre-2001 federal state-death-tax-credit table — effective marginal rates commonly stated as 0.8%–16% — administered by the Illinois Attorney General. The exclusion is not inflation-indexed and there is no portability between spouses, so a couple’s home, retirement accounts and life insurance can cross the line without deliberate planning. Status note (July 2026): the Family Farm Preservation Act (SB 1688 / HB 2677), which would create a $6M indexed exemption for qualified farm estates, remains a bill, not law — despite some coverage implying otherwise. Full table: estate tax by state.

Probate and the new $150,000 small-estate limit

Personal-representative and attorney compensation is reasonable-basis (755 ILCS 5/27-1, 27-2) — no percentage schedule. The bigger news most guides missed: Illinois’ small-estate affidavit limit is now $150,000 of personal property (755 ILCS 5/25-1, as amended by P.A. 104-0346) — up from the $100,000 figure still cited across ranking pages — and motor vehicles registered with the Secretary of State transfer outside the limit regardless of value. Context: probate cost by state · small-estate limits by state · will vs. trust calculator.

Is Illinois a good state to retire in for taxes?

On the taxes this page covers, the honest split verdict: excellent for retirement income — a full exemption with no age gate or income cap that beats most “tax-friendly” states outright — and demanding for wealth at death, where the un-indexed $4M cliff with no spousal portability catches estates that owe nothing federally. Retirees living on 401(k)/IRA/pension income do exceptionally well here; those with large taxable portfolios or $4M+ estates need a plan. (Property taxes, Illinois’ other famous burden, vary by county and are outside this guide’s scope.)

Illinois vs. its neighbors

State	Social Security	Pension / 401(k) / IRA	Estate tax	Inheritance tax
Illinois	Not taxed	Not taxed (all retirement income exempt)	Yes — $4M cliff, not indexed	None
Wisconsin	Not taxed	Exclude up to $24,000/person at 67+ (2025 Act 15)	None	None
Indiana	Not taxed	Fully taxable (state + county)	None	None (repealed 2012)
Michigan	Not taxed	Deductible up to ~$67,610/person (2026)	None	None
Florida	Not taxed	Not taxed (no income tax)	None	None

Comparison rows summarize general rules; see our 51-state retirement tax table for statute-cited detail.

Considering a Roth conversion? The converted amount is taxed as ordinary income in the year you convert, and Illinois may treat it differently from the retirement income above — see how all 51 jurisdictions tax Roth conversions.

Finding a financial advisor in Illinois

Per the SEC’s July 2026 Investment Adviser roster, Illinois has 674 SEC-registered advisory firms (#5 nationally) managing $7.94 trillion (#5 by AUM). Full breakdown: Illinois advisor statistics. Reviewing fee structures before or after a move: fee-drag calculator.

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Thinking about moving?

Four taxes change when you move state in retirement, not one: income tax on withdrawals, state estate tax, state inheritance tax, and what probate costs your heirs. Corridor comparisons involving Illinois:

Leaving Illinois? See leaving Illinois in retirement.

Compare any two states with the retirement tax comparison tool, or browse all corridors at the relocation hub.

What probate costs in Illinois

Illinois sets probate compensation by a “reasonable fee” standard with no percentage schedule, so anyone quoting a firm figure is estimating. And the small-estate shortcut of $150,000 does not clear a solely owned house on its own, which is the detail most guidance omits. Full detail with the governing statute, the court filing fee and the threshold: Illinois probate cost. To price a specific estate, use the probate cost calculator.

Cite or share this guide

Suggested citation: Clear Money Guide, “Illinois Retirement Taxes (2026 edition),” statute-cited; clearmoneyguide.com/illinois-retirement-taxes/. Free to cite with attribution and a link. Data verified July 23–24, 2026 against state statutes, session laws, and revenue-department guidance.

Does Illinois Tax Retirement Income? The Full Exemption, the 4.95% Catch, and the $4 Million Estate Cliff