Illinois Does Not Tax IRA Distributions: Roth, Early, and Subtraction

Illinois does not tax IRA distributions. When you calculate your Illinois income tax, you subtract the federally taxed portion of any distribution from a traditional IRA, SEP IRA, Roth conversion, or other qualified retirement plan before applying the state’s flat 4.95% rate.¹² The subtraction lives on Form IL-1040 itself, not on a separate schedule, and it applies whether you took the money at 55 or at 75.

Illinois begins with your federal adjusted gross income as the starting point for state tax. Under 35 ILCS 5/203(a)(2)(F), you then remove the federally taxed portion of qualified retirement distributions from that figure. The controlling phrase is “federally taxed portion.” You subtract the taxable amount that shows up on your federal return, not the gross distribution. Any after-tax contributions were never in your federal AGI to begin with, so they don’t factor into the subtraction either way.

The statute reaches distributions covered by Internal Revenue Code Sections 402 through 408, which sweep in most employer plans and every common flavor of IRA.³ Government pensions, military retirement pay, and payments to retired partners are included as well.

Which Accounts Qualify

The list of accounts that generate a subtractable distribution is broad. Illinois allows the subtraction for the federally taxed portion of distributions from:¹

Traditional IRAs and self-employed retirement (SEP) plans, reported on federal Form 1040, Line 4b
401(k) plans and other qualified employee benefit plans, reported on Line 5b
403(b) plans and state or local government deferred compensation plans under IRC Section 457
Government retirement and disability plans, including military pensions, reported as wages on Line 1z
Roth IRA conversions — amounts moved from a traditional IRA to a Roth IRA that are included in federal income
Railroad retirement income, reported on Lines 5b and 6b
Social Security benefits, reported on Line 6b

Distributions from non-qualified plans or deferred compensation arrangements that fall outside IRC Sections 402 through 408 do not qualify.⁴ If you aren’t sure how your plan is classified, ask the plan administrator before you file.

Early Withdrawals Still Qualify

This is where people most often get the rule wrong. A 10% federal penalty on an early withdrawal does not disqualify the distribution from the Illinois subtraction. Publication 120 states that early distributions from qualified plans and IRAs may be included in the subtraction.⁴ You still owe the federal penalty on your federal return, but the 4.95% Illinois tax comes off the distribution itself.

The Department of Revenue has confirmed in published guidance that the character of the distribution — early, normal, disability, or survivor — doesn’t change the analysis. What matters is whether the account is a qualified retirement plan.⁵ A withdrawal at 40 gets the same treatment as one at 70.

Roth IRA Distributions Work Differently

Qualified Roth IRA distributions are already tax-free at the federal level and never appear as taxable income on your Form 1040.⁶ Because the money isn’t in your federal AGI, there’s nothing for Illinois to subtract. It simply isn’t taxed on either return.

Roth conversions are the exception. When you convert a traditional IRA to a Roth, the converted amount is included in your federal taxable income for the year, and Illinois lets you subtract it on your state return.¹ You’ll pay the federal tax on the conversion, but not the state tax.

Claiming the Subtraction on Your Illinois Return

The subtraction goes on Form IL-1040, Line 5. A lot of do-it-yourself guides send filers to Schedule M instead. Schedule M handles other additions and subtractions; retirement and Social Security income has its own dedicated line on the main return.⁷

To complete Line 5 you’ll need three things:

Form 1099-R from your plan custodian, which reports the gross distribution and the taxable amount. Custodians must issue one for any distribution of $10 or more.⁸
Your federal Form 1040. The taxable amounts on Lines 4b (IRA distributions), 5b (pensions and annuities), and 6b (Social Security) add up to your Line 5 subtraction.
Pages 1 and 2 of your federal return, which Illinois requires you to attach to support the subtraction.⁴

The distribution code in Box 7 of your 1099-R identifies what kind of withdrawal you received. Code 7 is a normal distribution, Code 1 is an early distribution with no known exception, Code 3 is disability, and Code 4 is a payment to a beneficiary after the account holder’s death.⁹ For Illinois, the code doesn’t affect whether you qualify. It’s worth knowing in case the Department of Revenue asks a question about your return.

If You Leave Illinois

Federal law limits what Illinois can do after you move. Under 4 U.S.C. § 114, a state cannot impose income tax on the retirement income of someone who is no longer a resident.¹⁰ Once you’ve established residency elsewhere, Illinois has no claim on your IRA distributions, pension payments, or 401(k) withdrawals. Your new state’s rules take over, and they differ widely.

1
Illinois Department of Revenue. Does Illinois Tax My Pension, Social Security, or Retirement Income
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Illinois Department of Revenue. 2026 Booklet IL-700-T – Illinois Withholding Tax Tables
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Justia. Illinois Income Tax Act – Article 2 Provisions
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Illinois Department of Revenue. Publication 120 – Retirement Income
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Illinois Department of Revenue. IT 23-0005-GIL – Subtractions
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Internal Revenue Service. Retirement Plans FAQs Regarding IRAs Distributions (Withdrawals)
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Illinois Department of Revenue. 2025 IL-1040 Schedule M Instructions
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Internal Revenue Service. About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
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Internal Revenue Service. 2025 Instructions for Forms 1099-R and 5498
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Office of the Law Revision Counsel. 4 USC 114 – Limitation on State Income Taxation of Certain Pension Income