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Our bank was recently set up for backup tax withholding in Illinois for employee payroll, but not for IRAs. We contacted the Illinois Department of Revenue to determine how we can set up withholding for IRA distributions, but they were unable to provide us with any guidance. Can you confirm whether Illinois taxes retirement income? – IBA Compliance Connection

IBA Compliance Connection

Your go to source for compliance!

Our bank was recently set up for backup tax withholding in Illinois for employee payroll, but not for IRAs. We contacted the Illinois Department of Revenue to determine how we can set up withholding for IRA distributions, but they were unable to provide us with any guidance. Can you confirm whether Illinois taxes retirement income?

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Illinois does not tax retirement income, including distributions from IRAs and Roth IRAs. Consequently, we do not believe that any state tax withholding is necessary for IRA distributions in Illinois.

For resources related to our guidance, please see:

  • Illinois Department of Revenue, Q&As, Does Illinois tax my pension, social security, or retirement income? (“Illinois does not tax distributions received from: qualified employee benefit plans, including 401(K) plans; an Individual Retirement Account, (IRA) or a self-employed retirement plan; a traditional IRA that has been converted to a Roth IRA; . . .”)
  • Illinois Department of Revenue, Publication 120, Retirement Income (March 2019) (“What retirement income may I subtract on Form IL-1040, Line 5, and where is it reported on my federal return? . . . an Individual Retirement Account (IRA) (including amounts rolled over to a Roth IRA) or a self-employed retirement (SEP) plan as reported on your U.S. 1040, Line 4b.”)