Microglia are the primary resident immune cells in the retina. They regulate neuronal survival and synaptic pruning making them essential for normal development. Following injury, they mediate adaptive responses and under pathological conditions they can trigger neurodegeneration exacerbating the effect of a disease. Retinal organoids derived from human induced pluripotent stem cells (hiPSCs) are increasingly being used for a range of applications, including disease modelling, development of new therapies and in the study of retinogenesis. Despite many similarities to the retinas developed in vivo, they lack some key physiological features, including immune cells. We engineered an hiPSC co‐culture system containing retinal organoids and microglia‐like (iMG) cells and tested their retinal invasion capacity and function. We incorporated iMG into retinal organoids at 13 weeks and tested their effect on function and development at 15 and 22 weeks of differentiation. Our key findings showed that iMG cells were able to respond to endotoxin challenge in monocultures and when co‐cultured with the organoids. We show that retinal organoids developed normally and retained their ability to generate spiking activity in response to light. Thus, this new co‐culture immunocompetent in vitro retinal model provides a platform with greater relevance to the in vivo human retina.