Deciding how to utilize your investment earnings can be challenging and having a calculator may help you estimate the best way to distribute your profits. By adding your starting balance, annual growth rate, and some other simple details, you can establish your maximum distributions or the length of time the savings will last you. This can be helpful when budgeting for your future or planning your retirement.
Let us start by reviewing what this calculator may be used for, and then continue to how you may actually use it.
What are distributions?
The term distribution is used in stocks and investments to describe the movement of a security and means the volume is less than what it was the previous day. It can refer to the disbursement of assets from a retirement account, a company's payment of stock or cash to its shareholders, or even the earnings from a mutual fund. So in the simplest terms, an investment distribution is an allocation of income generated by an investor during the calendar year.
The payments can come in the form of interest, capital gains, principle, or dividends and 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, making it difficult to estimate earnings over time.
Please reading on to learn about how investment distributions work and how to use our investment distributions calculator.
How do investment distributions work?
Distributions may come from different sources in several formats, and 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, and when it 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 proportionate to the shareholding. However, the profit and earnings may vary based on the success of the company.
Another investment strategy is a mutual fund, in which the distributions may also come in the form of dividends, as well as interest income, or capital gains collected from portfolio holdings. The distributions are generated from the sale of the mutual fund investment, minus any operating expenses. Therefore, a mutual fund stock bought at $50 and sold for $100 results in $50 capital gains minus any operating fees and expenditures.
Individual retirement accounts, such as 401(K), 403(b), or 457 plans, represent another great investment opportunity. These are optional pension programs sponsored by employers, and these qualified plans must meet certain requirements before distributions may occur. For some accounts, the account holder must reach a certain age or meet an account maturity requirement, so that distributions may happen at any frequency or amount without penalty.
The investment distribution calculator is most useful for retirement distributions, but it is very versatile and can be used for any investment account.
How to use the investment distribution calculator – step by step
The investment distribution calculator is very simple to use and is comprised of two parts: an information intake summarizing your investment distributions and your integrated results. To be used effectively, it requires accurate knowledge of your investment account balance and performance.
Step 1: Set out the starting balance of your investment account on the first line of the calculator, using the arrow feature to make this selection even 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 if you would like to calculate the years your balance will last receiving a specific distribution amount, or the maximum distribution you can take over a period. You may make the selection underneath "Calculate" based on your requirements.
Step 3a: If you opted for the years your balance will last, identify a distribution amount on the second line of the calculator, followed by a distribution frequency on the third line.
Step 3b: If you decided to calculate your maximum distributions for a period of time identify your distribution frequency on the third line, and 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 will only be factored in depending on your selection for “inflation adjustment” at the end of the information intake.
Step 6: Underneath “inflation adjustment”, you are presented with a multi-choice selection of whether you would like to adjust your distributions according to inflation or not.
Quick Tip #1
As the value of the dollar changes so does the buying power, therefore if you expect to receive distributions for many years annual adjustments will ensure your quality of living doesn't change. While 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 proceed to view your integrated investment distribution results.
Your investment distribution results
Once this information is added to the investment distributions calculator you may view your results in the form of information prompts, graphs, and detailed tables to assist in your understanding.
Immediately to the right of the data inputs, you will be notified of your total investment earnings, which is the interest accrued over the life of the investment, as well as the total distributions, which is a sum of the earnings and principal balance. More detailed results are available below the information intake.
Directly below the information fields is another prompt identifying how long your distributions will last, with an accompanying graph of your investment balance by year. You may hold your mouse over any point on the line graph to get an exact reading of you balance by year or month. For a more detailed line by line analysis, please view the next tab.
The "Investment results by year" tab provides an itemized summary of your investment distributions by year, including withdrawals, investment earnings, and the ending balance. All the columns may be expanded or constricted for better viewing if required.
Please note that this calculator does not take in any taxation or potential penalties that may incur from withdrawals. Therefore further calculations may be necessary to understand the actual value of your distributions.
Not all forms of investment income are taxed equally
Due to the variance in investment options and payment types, earnings may be subject to different levels of taxation. Tax is highly dependent on the structure of the investment and how the distributions are declared. Here we will briefly review the tax implications for some common sources of distributions: interest, dividends, capital gains, and principle, while 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, which may be quite a bit higher. Taxation on non-qualified dividends can go up to 39.6%, with additional surtaxes for high earning individuals.
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 and couples. 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 taxation implications were reviewed here, as there are many exceptions to the rules and intricacies surrounding investment tax. 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, and use the share feature to help others with any questions they may have regarding their investment allocations.