Do SEP IRA Withdrawals Count as Income?

Simplified employee pension individual retirement accounts offer tax-deferred savings and allow employers to contribute money on their employees' behalf. Your employer can't prohibit you from taking money out, but the Internal Revenue Service might impose penalties. For distributions, SEP IRAs follow the same rules as traditional IRAs.

Taxable Income

Distributions from your SEP IRA count as taxable income because you didn't pay taxes on the money when it went into the account. No matter how you've invested the money in the SEP IRA, it always counts as ordinary income. For example, even if the money in the SEP IRA was used to buy stocks that you've held for more than one year, the distributions won't count as long-term capital gains income.

Tax Rates

Since SEP IRA distributions are taxed at your ordinary income tax rate, your tax rate depends on how much you're taking out and how much other income you have. For example, if you fall in the 25 percent tax bracket, your SEP IRA distribution will be taxed at 25 percent -- unless it puts you in a higher tax bracket. If that's the case, you'll pay the higher tax rate only on the portion of the distribution that falls in the higher tax bracket.

Tax Penalties

Your SEP IRA distribution might also get hit with early withdrawal tax penalties if you're under 59 1/2 years old when you take the withdrawal. The penalty equals 10 percent of the withdrawal and adds to your taxes, rather than replacing the income taxes on the distribution. For example, if you take a $15,000 distribution before turning 59 1/2, not only will you pay income taxes on it, you'll also pay $1,500 in tax penalties unless an exception applies.

Penalty Exceptions

Even if you're under 59 1/2, you can avoid early withdrawal penalties on your SEP IRA withdrawals if you qualify for an exception. The Internal Revenue Service doesn't give broad exceptions for hardships or losing your job. Rather, you must meet the requirements for a specific exception, such as a permanent disability, higher education expenses, up to $10,000 for a first home, medical premiums while you're out of work or a qualified reservist distribution.

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