Distribution Definition

The distribution business definition most often means paying assets out of a fund, account, or security to an individual. We’ll help you understand how this distribution definition differs from other definitions of the word. We’ll also explain how understanding the definition of distribution can help you prepare yourself and your company for retirement and beyond.

Distribution Definition

In this article, we’ll use the word “distribution” to refer to the disbursement of assets from a fund, account, or individual security to an investor or individual beneficiary.

Types of Distributions

There are three main types of distributions that investors should understand. We’ll walk you through them. The definition of distribution most relevant to investors like you include:

• When a mutual fund distributes capital gains or income to investors
• When a public company distributes interest or returns capital to shareholders
• When a retirement account owner takes distributions in the form of taxable income

We’ll discuss each of these types of distributions below to help you get a handle on when you should expect to see them.

Understanding Distributions

Mutual Fund Distributions

Mutual fund distributions represent capital gains and dividend or interest income generated by the fund for its investors during a calendar year. One mutual fund distribution example is net capital gains distributions that come from profits on the sale of a mutual fund’s holdings. A capital gains distribution is a cash payment made by a mutual fund’s owner. If a mutual fund holds a capital asset for more than one year and then sells it, the fund usually passes on the profit to you as a capital gains distribution. For many investors, this helps a great deal with their taxes.

Securities Distributions

With securities like stocks or bonds, distributions come in the form of payment interest, principal, or dividends to shareholders or bondholders. Corporations can reinvest their profits back into their business. However, distribution advantages include a corporation’s ability to pay a portion of the profit to its shareholders in the form of a dividend. 

Retirement Account Distributions

Retirement account distributions fall into two categories.

• Distributions before age 59½ are subject to an IRS penalty and ordinary income tax. 
• Distributions made at or after age 59½ are made without penalty, but you’ll still pay ordinary income taxes at your current tax bracket.

Nearly all retirement plans require you to begin withdrawing funds once you reach the age of 72. The amount you need to deduct from your account depends on your age and the value of the funds in the account. You can learn more about required minimum distributions (RMDs) from the IRS guidelines.

Distributions: A Summary

• A distribution generally refers to the disbursement of assets from a fund, account, or individual security to an investor.
• Mutual fund distributions usually consist of net capital gains made from the profitable sale of portfolio assets. 
• With securities, like stocks or bonds, a distribution is a payment of interest, principal, or dividend by the issuer of the security to investors.
• Retirement accounts carry required minimum distributions—mandatory withdrawals after the account holder reaches a certain age.

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