Background: This study addresses limitations of prior research that have used group comparison designs to test the effects of parental illness on youth. Purpose: This study examined differences in adjustment between children of a parent with illness and peers from ‘healthy’ families controlling for the effects of whether a parent or non-parent family member is ill, illness type, demographics and caregiving. Methods: Based on questionnaire data, groups were derived from a community sample of 2,474 youth (‘healthy’ family, n = 1768; parental illness, n = 336; other family member illness, n = 254; both parental and other family illness, n = 116). Results: The presence of any family member with an illness is associated with greater risk of mental health difficulties for youth relative to peers from healthy families. This risk is elevated if the ill family member is a parent and has mental illness or substance misuse.Conclusions: Serious health problems within a household adversely impact youth adjustment.