Yes, you can work while taking a 72(t) distribution. The IRS does not restrict wages, employment, or business income for taxpayers who are receiving Substantially Equal Periodic Payments (SEPPs). As long as your 72(t) payments continue on schedule and follow the IRS rules, you’re free to work full-time, part-time, or run a business.
This flexibility makes 72(t) distributions useful for early retirees, business owners, and individuals transitioning between careers who want penalty-free access to retirement funds without giving up earned income.
Why Does the IRS Allow You to Work While on a 72(t)?
The IRS rules for 72(t) focus on payment structure, not employment status. The purpose of the SEPP program is to allow early access to retirement funds if you agree to follow a strict withdrawal schedule—not to force early retirement.
The IRS cares about two things:
- You take the required amount every year
- You continue for five years or until age 59½, whichever is longer
Your job situation or income level does not affect your eligibility or compliance.
What Happens if Your Income Changes While on a 72(t)?
Your employment income—whether it increases, decreases, or disappears—does not change your SEPP amount. Once your 72(t) plan is established:
- You cannot increase or decrease the payment
- You cannot pause or stop the withdrawals
- You must follow the exact IRS calculation method
If your financial situation changes unexpectedly, you still must continue the 72(t) plan until the required time period ends. Stopping early triggers back taxes, penalties, and interest.
Why Some Taxpayers Work While Taking 72(t) Withdrawals
Many taxpayers maintain employment while using 72(t) distributions because it can support financial flexibility. Common scenarios include:
- Transitioning to part-time work before full retirement
- Switching careers or taking a sabbatical
- Starting a business that may produce inconsistent income
- Using 72(t) to bridge income gaps before Social Security or pension payments start
- Supplementing reduced work hours during early retirement
Working while taking SEPPs often helps preserve long-term savings and provides a smoother path into retirement.
Important Considerations Before Working and Taking 72(t)
Even though working is allowed, consider these factors:
- Additional income may push you into a higher tax bracket, raising taxes on SEPPs
- A higher income year may reduce eligibility for certain deductions or credits
- A stable income may allow you to invest more, which could offset the impact of SEPP withdrawals
Because 72(t) plans are long-term and non-adjustable, many taxpayers prefer CPA consultation before starting. Dimov Tax is ready to present expert assistance.