Understanding your investment distributions can be challenging. Using this calculator can help you estimate your earnings quickly. By adding your starting balance, annual growth rate, and some other simple details, you can find out how much you can take from your earnings or how long the investment income will last you. On this page you will also find out the how investment earnings are taxed.
What are distributions?
The term distribution is used in stocks and investments to describe the movement of a security. It means the volume is less than what it was the previous day.
It can refer to the disbursement of assets from a retirement account or a company’s payment of cash to its shareholders. It can even apply to the earnings from a mutual fund. So in the simplest terms, an investment distribution is an allocation of income made by an investor during the calendar year.
The payments can come in the form of interest, capital gains, principle, or dividends. It is important to know the difference as each payout has different tax implications. Distributions can also be given at various frequencies and different amounts while growing at an annual rate.
Please keep reading to learn about how distributions work and how to use the investment distributions calculator.
How do investment distributions work?
Distributions can come from different sources in several formats. Here we will review distributions relative to three common types of investments.
When an investment is made into a corporation, the company reinvests the funds into the business. When the organization earns a profit, an after-tax portion gets distributed to shareholders in the form of a dividend. Dividends are fixed shares that can be issued as cash payments, shares of stock, or any other types of property relative to the shareholding. The profit and earnings can vary based on the success of the company.
Another investment strategy is a mutual fund, where the distributions may also come in the form of dividends. You can also receive interest income or capital gains from portfolio holdings. The distributions are generated from the sale of the mutual fund investment, minus any operating expenses. A mutual fund stock bought at $50 and sold for $100 results in $50 capital gains minus fees and expenses.
Individual retirement accounts, such as 401(K), 403(b), or 457 plans, are another great security. These are optional pension programs that must meet certain requirements before payments can be taken. For some accounts, the account holder must reach a certain age or meet an account maturity requirement. Afterwards, the distributions can happen at any frequency or amount without penalty but are considered regular income.
The investment distribution calculator is most useful for retirement distributions, but it is very versatile and can be used for any investment.
How are investments taxed?
Due to the variance in investment options and payment types, earnings may be subject to different levels of taxation. Tax depends on the structure of the investment and how the distributions are declared. Here we will review the tax implications for some common sources of distributions: interest, dividends, capital gains, and principle. The exceptions, intricacies, and more detailed tax rules may be found on the IRS website.
Interest: interest is viewed as ordinary income by the federal government, and thus is subject to regular marginal income tax rates. This extends to pre-tax retirement accounts, corporate bonds, most municipal bonds, and even zero-coupon bonds.
Dividends: US companies pay out dividends from after-tax profits, so shareholders get a preferential tax rate of 15% on qualified dividends. However, non-qualified dividends that are paid out by foreign companies and dividends paid from interest on bonds or mutual funds are taxed at regular income rates. Marginal tax rates are quite a bit higher but depend on your income.
Capital gains: realized capital gains tax depends on how long the investor held the security. Stocks and securities held for longer than a year are considered long-term and are taxed at 15%, with higher taxation of 23.8% for high-income individuals. Alternatively, holdings short of a year are considered short-term and are taxed at regular income tax rates.
Roth IRA and Principle: principle payments are considered a return of capital, and therefore are not subject to any taxation. Similarly, contributions to a Roth IRA are made after tax and are available tax-free once age requirements and account maturities are met.
Only the necessary tax implications were reviewed here, as there are many exceptions to the rules surrounding investment taxation. It is best to refer to the IRS website or a qualified accountant to maximize your investment income.
Kindly remember to bookmark the investment distributions calculator to your home screen. If you found this page useful, you can promote us on social media and help others out when it comes to taking payments from investments.
How to use the calculator
The investment distribution calculator is very simple to use. It has two parts: an information intake and integrated results. To be used effectively, it needs your account balance and investment performance.
Step 1: Set out the starting balance of your investment account on the first line of the calculator. You can use the arrow features to make this selection easier. You may use a combination of 401(K), 403(b), annuities, or IRAs, or make separate calculations for each investment.
Step 2: You should decide how you would like to get your payments. You can calculate the years your balance will last receiving a particular amount, or the maximum payments you can take for a certain time period. You can make the selection underneath “Calculate”.
Step 3a: If you opted for the years your balance will last, pick a distribution amount on the second line of the calculator. Then choose a distribution frequency on the third line.
Step 3b: If you decided to calculate your maximum distributions for a period of time, pick your distribution frequency on the third line. Then the years you would like to receive distributions on the fourth line, to estimate what you will be entitled to.
Step 4: On the fifth line of the calculator add the annual rate of return on your investment.
Step 5: Identify an expected annual economic inflation rate on the fifth line of the calculator. This is only relevant based your selection for “inflation adjustment” at the end of the information intake.
Step 6: Underneath “inflation adjustment“, you are presented with a choice of whether to adjust your distributions according to inflation or not.
As the value of the dollar changes so does its buying power. If you expect to take payments for many years, annual adjustments will ensure your quality of living doesn’t change. On the other hand, short-term payouts and distributions will not be as affected by inflation rates, making this selection less necessary.
Step 7: Please view your investment distribution results.
You can view your results in the form of smart prompts, graphs, and tables to see your investment earnings.
Immediately to the right of the data inputs, you can see your total investment income. This is the interest accrued over the life of the investment. You can also check out the total distributions, which is a sum of the earnings and principal balance. More detailed results are available below the information intake.
Below the information fields is another prompt displaying how long your distributions will last. This can help you decide if the stated payments will meet your needs.
There is a line graph of your investments under the balance by year tab. You can hold your mouse over any point on the line graph to get an exact reading of the balance at that exact point. For a more detailed analysis, please view the next tab.
The “investment results by year” tab provides a list of your investment distributions each year. This includes withdrawals, investment earnings, and the ending balance. All the columns may be expanded or contracted for better viewing.
Please note that this calculator does not take in any taxes or potential penalties that may incur from withdrawals. More calculations might be needed to understand the actual value of your investment income.