Illinois does not tax qualified Roth IRA distributions, and it does something most states don’t: it lets you subtract Roth conversion income from your state return as well. For Illinois residents, the state tax on a Roth IRA is usually zero, whether you’re pulling money out in retirement or converting a traditional IRA now. The flat 4.95% rate only reaches Roth money in narrow situations, and even then a broad retirement income subtraction often erases it.
Why Illinois Follows the Federal Result
Your IL-1040 starts on Line 1 with the adjusted gross income from your federal return.1Illinois Department of Revenue. 2025 IL-1040 Instructions, Illinois Individual Income Tax Illinois then applies its own additions and subtractions to reach base income, which is taxed at 4.95%.2Illinois Department of Revenue. 2026 Booklet IL-700-T, Illinois Withholding Tax Tables If income never appears in your federal AGI, Illinois never sees it. That’s why the favorable federal treatment of Roth accounts flows through to the state almost automatically.
Qualified Distributions Owe Nothing to Illinois
A qualified Roth distribution is excluded from federal gross income, so it’s excluded from Illinois income too.1Illinois Department of Revenue. 2025 IL-1040 Instructions, Illinois Individual Income Tax The money doesn’t show up on Line 1 of your IL-1040, and you don’t need to claim any subtraction to keep it out.
To qualify, two things must be true. You must be at least 59½ (or the distribution must be due to disability or death), and you must have held a Roth IRA for at least five tax years.3Internal Revenue Service. Retirement Topics – Designated Roth Account Meet both, and every dollar comes out free of federal and Illinois tax, contributions and earnings alike.
Two Different Five-Year Clocks
The five-year requirement is actually two separate rules, and mixing them up is a common mistake.
The first clock starts January 1 of the year you make your first-ever Roth IRA contribution. If you opened your first Roth with a 2024 contribution, that clock started January 1, 2024, and runs through December 31, 2028. Once it’s passed and you’re at least 59½, all earnings withdrawals are qualified. Your original contributions can always come out tax- and penalty-free regardless of this clock, because you already paid tax on that money going in.
The second clock is per conversion. Each Roth conversion has its own five-year holding period, starting January 1 of the year the conversion happens. Pull converted amounts out before age 59½ and before five years have passed, and the converted pre-tax dollars are hit with the 10% federal early withdrawal penalty. Once you turn 59½, that penalty no longer applies to converted amounts no matter how recent the conversion.
Roth Conversions: The Biggest Illinois Advantage
When you convert money from a traditional IRA or 401(k) into a Roth IRA, the converted amount lands in your federal AGI and is taxable federally. Illinois lets you subtract the entire conversion amount from your state base income.4Illinois General Assembly. Illinois Compiled Statutes 35 ILCS 5/203 The Illinois Department of Revenue confirms that amounts received from a traditional IRA that has been converted to a Roth IRA are not taxed by the state.5Illinois Department of Revenue. Does Illinois Tax My Pension, Social Security, or Retirement Income?
The practical result is straightforward. You owe federal tax on the conversion, and you save the 4.95% Illinois tax entirely. On a $100,000 conversion, that’s $4,950 you don’t pay to Springfield. You report the conversion on your federal return, then subtract the same amount on your IL-1040, zeroing out the state impact.6Illinois Department of Revenue. Publication 120, Retirement Income This treatment has been in place since 1998 with no sunset, which is why multi-year conversion strategies work well for Illinois residents.
Direct rollovers between two Roth IRAs are not taxable federally and have no Illinois tax consequences either.
Non-Qualified Withdrawals and the Retirement Income Subtraction
If a distribution doesn’t meet the qualification requirements, the earnings portion goes into your federal AGI and is federally taxable.7Internal Revenue Service. Roth IRAs The IRS may also add a 10% penalty on those earnings if you’re under 59½.8Internal Revenue Service. Topic No. 557, Additional Tax on Early Distributions From Traditional and Roth IRAs
Illinois softens the state side of this. A broad retirement income subtraction under 35 ILCS 5/203(a)(2)(F) covers federally taxed distributions from retirement accounts, including IRAs.4Illinois General Assembly. Illinois Compiled Statutes 35 ILCS 5/203 Publication 120 tells taxpayers to subtract the federally taxed portion of IRA distributions on Line 5 of the IL-1040.6Illinois Department of Revenue. Publication 120, Retirement Income That subtraction likely covers taxable earnings from a non-qualified Roth distribution as well, though Publication 120 doesn’t name Roth distributions specifically. If you take a non-qualified withdrawal, confirm the Line 5 treatment with a tax professional or the current IL-1040 instructions.
Only earnings are ever at risk. Roth distributions follow an ordering rule: your original contributions come out first, then converted amounts, and earnings come out last. You’d need to withdraw more than the sum of your contributions and conversions before any taxable earnings enter the picture.
Illinois does not impose its own early withdrawal penalty. The state cares only about whether taxable earnings end up in base income, so the federal exceptions to the 10% penalty are a federal-return issue.9Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
Inherited Roth IRAs
When someone inherits your Roth IRA, contribution withdrawals come out tax-free. Earnings withdrawals are also tax-free as long as the original owner’s Roth had been open at least five years at the time of the withdrawal. If the account was less than five years old, the earnings can be federally taxable, and in that case Illinois’s retirement income subtraction applies to the federally taxed amount.
The distribution timeline depends on who inherits. A surviving spouse can roll the inherited Roth into their own Roth IRA and treat it as if they’d always owned it, with no required withdrawals during their lifetime and the five-year clock carried over from the original owner. Most non-spouse beneficiaries who inherit from an owner who died in 2020 or later must empty the account by the end of the tenth year after the owner’s death. Eligible designated beneficiaries (minor children of the deceased, disabled or chronically ill individuals, and people not more than ten years younger than the owner) can stretch distributions over their own life expectancy.10Internal Revenue Service. Retirement Topics – Beneficiary
Naming beneficiaries directly on the account also keeps the Roth IRA out of Illinois probate.
The Illinois Estate Tax Still Applies
Income tax is where the Roth wins in Illinois. Estate tax is where it doesn’t. Illinois imposes its own estate tax, and the value of your Roth IRA is included in your gross estate.11Illinois Attorney General. Important Notice Regarding Illinois Estate Tax and Fact Sheet
The Illinois exemption is $4 million. Estates under that threshold owe no state estate tax. Estates above it face a graduated rate that tops out at 16% for estates more than about $10 million above the exemption. Illinois has no separate inheritance tax, so beneficiaries aren’t taxed on what they receive.11Illinois Attorney General. Important Notice Regarding Illinois Estate Tax and Fact Sheet
The gap between state and federal thresholds matters. For 2026, the federal estate tax exemption is $15 million per individual under the One, Big, Beautiful Bill signed in July 2025.12Internal Revenue Service. What’s New – Estate and Gift Tax A $6 million estate owes zero federal estate tax but can owe Illinois estate tax, and a well-funded Roth IRA is exactly the kind of asset that pushes an otherwise exempt estate over the $4 million state line. If your estate is approaching that number, count the Roth balance in the total.
Even so, the Roth remains one of the most efficient assets to leave behind. The value counts toward the Illinois estate tax calculation, but the distributions your beneficiaries later take remain income-tax-free, assuming the five-year rule is satisfied.