Chicago Retirement Tax Guide: Illinois Exempts All Retirement Income

Here is a secret most people do not know: Illinois exempts all retirement income from state income tax. Social Security, pensions, 401(k) distributions, IRA withdrawals — all completely tax-free at the state level. For retirees who love urban living, Chicago offers world-class amenities with a retirement tax advantage that rivals Florida and Texas.

Complete Retirement Income Exemption

Illinois\'s flat 4.95% income tax does not apply to any retirement income. This includes Social Security benefits, government and private pensions, 401(k) and 403(b) distributions, traditional and Roth IRA withdrawals, and annuity payments. A retiree with $100,000 in annual retirement income saves $4,950 compared to states that fully tax retirement income.

Property Tax Challenge in Cook County

The trade-off is Cook County\'s high property taxes — averaging 2.1% of assessed value. On a $400,000 Chicago home, that is $8,400 per year. However, seniors qualify for the Senior Citizen Homestead Exemption ($8,000 reduction in assessed value) and the Senior Freeze, which locks your assessed value if household income is below $65,000.

Chicago\'s Retirement Lifestyle

Chicago offers retirees world-class museums, theater, dining, and lakefront recreation at lower costs than coastal cities. The CTA provides excellent public transit, reducing the need for a car. Many retirees find that Chicago\'s cultural richness and neighborhood diversity create an engaging retirement experience.

Strategic Roth Conversions Before Retirement

Since Illinois does not tax retirement income, the Roth conversion calculus is different here. Converting traditional IRA funds to Roth while still working in Illinois means paying 4.95% state tax on the conversion — but gaining federal tax-free withdrawals forever. If you plan to stay in Illinois, this trade-off may not be worthwhile unless you are optimizing for federal taxes.