Distribution

There are some different senses of “distribution” term in the economic sphere, nevertheless, they mainly designate the process of asset disbursement from a fund, pool or bank balance to a particular investor. If a person has a retirement account, then upon reaching the established age, its holder will receive calculated retirement distributions, another commonly used mention of this term. A company's payouts to shareowners for their stocks and other assets are also called “distribution”. Regardless of the receipt source, distribution payments, which come from various financial instruments, are sent straight to a particular beneficiary, most often electronically, but sometimes in the check form.

Distribution meaning

The concept of distribution in the world of economics and finance can reflect and explain different situations. Usually it is the process by which a certain fund or a public company passes dividends, interest, coupons, returns, surplus value and any other capital gains to its owners, but it can also refer to the taxable income received by the retirement account holder. Distributions can often be regarded in the form of cash that goes directly into a pocket of the issuer.

Distribution types

Depending on the source, purpose and method of using funds, several types of distribution are distinguished.

Mutual fund distributions. In the case of mutual funds, the distribution is expressed in the process of capital gains allocation among contributors at set intervals within a calendar year. The two main components of the distribution of mutual funds are the net capital gains in the form of profits that, for example, can be received from the sale of assets held in the portfolio of a certain investor, as well as dividends, coupons and interest that these assets bring on a regular basis. These earnings are passed to participants of the mutual fund. 

The following situation can serve as an example of the net capital gain coming from the sale of an asset by a mutual fund. For instance, if a mutual fund share were bought at the price of $100 and sold later at the price of $200, the capital gain would be $100. The fund's operating costs would need to be deducted from this sum, after which the final distribution amount could be understood. 

After the distributions are made, the price of the fund's assets inevitably decreases by the total amount of these distributions. The price decrease is due to a decrease in the net asset value (since distributions are deducted from the total assets of the fund).

Distributions from public companies. The procedure of paying to holders dividends or coupons from holding securities and bonds respectively is another distribution type, which is carried out by corporations and public companies. 

Most often, well-managed firms do not distribute to the holders the whole of their earned profits. As a rule, they retain a part of it and put it back into the business. The return received from the company's activities can be used for the further growth of the company and the development of this business, that is, it can be reinvested, or sometimes it can be paid in part to shareholders in the form of dividends, for example. 

It should also be mentioned that there is a dividend reinvestment plan, in which case additional assets can be purchased. If the investor chooses the option of abandoning the reinvestment plan, then his account is replenished in cash.

Distributions from investment fund. The distribution of income received from investment funds usually occurs on a monthly or quarterly basis, which is comparable to the frequency of stock dividends. Nevertheless, the annual profitability of distributions is quite high, about 10% per year. The distributions affect the taxable income of the trust, namely, reduce it, in some cases income tax may not be paid at all.

Retirement account distributions. Once the individual retirement account (IRA) was created, distributions from it can already begin to be made. There are two types of distributions. 

• Income tax is levied on distributions under the age of 59.5 years. If the holder uses the funds held in the individual retirement account before this age (these amounts an individual withdraws are usually called “early” or “premature”), in addition to this tax, a penalty of about 10% may be paid unless any exceptions apply. For example, if the holder have made significant purchases or used the funds in any forced situation, so, he can catch a fine.
• However, if the age of the holder is 59.5 and above, in this case, the distributions occurs without any penalties.

Required distributions from retirement plans. Required minimum distributions (RMDs) generally are minimum amounts that a retirement plan account holder must withdraw per year starting with the year that he reaches 72 or the year in which he retires. Retirement plan participants are responsible for withdrawing the correct amount of RMD from their accounts each year, and face severe penalties for not using RMD. As a rule, a RMD is calculated for each account by dividing the previous December 31 balance of that IRA or retirement plan account by a life expectancy factor that the IRS publishes in special tables.