The Illinois Roth Loophole Calculator
Illinois doesn't tax retirement income — so funding a Traditional 401(k) and later converting to Roth can lock in a 4.95% state tax savings that a Roth 401(k) gives away.
Compare the Two Paths
Roth 401(k) now vs. Traditional 401(k) → convert to Roth later
Side-by-side breakdown
| Step | Path A · Roth 401(k) | Path B · Trad. 401(k) → Roth |
|---|
A deduction going in. No state tax coming out.
Illinois levies a flat 4.95% income tax — but it fully exempts qualified retirement income from state tax. Distributions from 401(k)s, traditional and Roth IRAs, and even Roth conversions are all subtracted from your Illinois taxable income (35 ILCS 5/203).
That asymmetry creates an opportunity. When you contribute to a Roth 401(k) (or just take the pay as cash), the dollars are taxed on the way in — you pay federal income tax and the 4.95% Illinois tax before the money is yours. But when you put the same dollars into a Traditional (pre-tax) 401(k) first, you take a deduction against both federal and Illinois income. Later, when the money comes out — whether you convert it to Roth or simply withdraw and spend it — you pay the federal tax you'd have owed anyway, but Illinois charges nothing.
Contribute pre-tax
Fund a Traditional 401(k). You skip federal tax and the 4.95% Illinois tax on every dollar you defer.
Convert to Roth
Convert in a year that suits your bracket. Federal tax applies — Illinois exempts the conversion entirely.
Keep the 4.95%
The state tax a Roth 401(k) would have charged is permanently saved, and the balance now grows tax-free.
And you don't have to convert to capture it. The Illinois saving comes from the deduction going in and the exemption coming out — so it holds whether you eventually convert the balance to Roth or simply withdraw and spend it in retirement. Either way you'll owe the federal tax you would have paid on those wages regardless, while Illinois charges nothing on the way out. Converting just adds the bonus of tax-free future growth on top. Use the "What will you do with the money?" switch at the top of the calculator to see it both ways.
The bigger the dollars and the longer your runway, the more this compounds. It's also why timing matters: a low-income year — early retirement, a gap before Required Minimum Distributions begin at 73 — can let you convert or withdraw at a lower federal bracket while Illinois stays at zero either way. The right sequence depends on your brackets, your other income, Medicare (IRMAA) exposure two years out, and your estate plan. That's the conversation worth having.
One federal caveat. Illinois never taxes these distributions — but the federal rules still apply. Money taken from a 401(k) or IRA, or earnings withdrawn from a Roth, before age 59½ generally carry a 10% federal early-withdrawal penalty on the taxable amount unless an exception applies, and each Roth conversion has its own 5-year clock. These are federal costs; Illinois imposes no early-withdrawal penalty of its own. Use the "access before 59½" toggle in the calculator to factor the penalty in.
This material is for educational purposes only and is not individualized investment, tax, or legal advice. Figures reflect general assumptions and tax rules for the stated year and are subject to change. Verify current law and consult a qualified professional regarding your specific situation before acting.