Distribution vs withdrawal for an investment account
A mutual fund makes distributions of its dividends and capital gains, usually once a year, or seminanually or quarterly or monthly etc; it does not distribute any capital losses to its shareholders but holds them for offsetting capital gains in future years, (cf, this answer of mine to a different question). A stock pays  dividends; a stock neither has nor does it  distribute capital gains: you get capital gains (or losses) when you sell the shares of the stock, but these are not called distributions of any kind. Similarly, you incur capital gains or losses when you  redeem shares of mutual funds but these are not called distributions  either. Note that non-ETF mutual fund shares are generally not bought and sold on stock exchanges; you buy shares directly from the fund and you sell shares back (redeem them) directly to the fund.  All of the above transactions are taxable events for the year to you unless the shares are being held in a tax-deferred account or are tax-free for other reasons (e.g. dividends from a municipal bond fund).
From a federal tax point of view, withdrawals from 529 plans are treated as taxable unless they are used on qualified expenses: The part of a distribution representing the amount paid or contributed   to a QTP does not have to be included in income. This is a return of   the investment in the plan. The designated beneficiary generally does not have to include in   income any earnings distributed from a QTP if the total distribution   is less than or equal to adjusted qualified education expenses   (defined under Figuring the Taxable Portion of a Distribution ,   later). [...] To determine if total distributions for the year are more or less than   the amount of qualified education expenses, you must compare the total   of all QTP distributions for the tax year to the adjusted qualified   education expenses. You'll have to include them in your income and pay normal income tax on them, and also in most cases pay an extra 10% penalty: Generally, if you receive a taxable distribution, you also must pay a   10% additional tax on the amount included in income. You'd have to check on the situation from a state perspective but I'd imagine it's quite similar. The basic point is that non-qualified distributions are treated as earnings. Yes, you may make non-deductible contributions to an IRA. The main benefit of a non-deductible IRA is tax-deferred earnings. If the investment pays out dividends, they will be kept in the IRA (whether you take them in cash and put them in a Cash Management Account, or you automatically reinvest them). You do not get taxed on these earnings until you withdraw from the IRA during retirement. If your income at that time is significantly lower than your income while you're working, you will be in a lower tax bracket (unless tax rates change drastically between now and then), so the taxes you pay on these earnings will be lower than if you'd invested outside the IRA and paid taxes along the way. You also get the benefit of compounding of the tax-deferred earnings. There's one caveat -- when you withdraw from the IRA, all the growth is treated as ordinary income. Even if some of it is capital gains, it will be taxed at your ordinary income rate, not your capital gains rate. So this is most beneficial for investments that produce dividends.  If you have a mix of deductible and non-deductible contributions to your IRA, the tax on the principle portion of your withdrawals is pro-rated based on the ratio of deductible to total contributions. This ensures that you eventually get taxed for the deductible portion (it's not really tax-free, it's tax-deferred), but don't get taxed twice for the non-deductible portion. Another option, if your 401(k) plan allows it, is to make after-tax contributions to the 401(k). At the end of the year, you can make an in-service distribution of these contributions and their earnings from the 401(k) to a Roth Conversion IRA. This allows you to contribute to a Roth IRA even if you're above the income limit for normal Roth IRA contributions. You can also do this even if you're also making non-deductible contributions to your regular IRA. You're misunderstanding the concept of retirement savings. IRA distributions are taxed, in their entirety, as ordinary income. If you withdraw before the retirement age, additional 10% penalty is added. Investment income has preferential treatment - long term capital gains and qualified dividends are taxed at lower rates than ordinary income. However, IRA contributions are tax deductible. I.e.: you don't pay taxes on the amounts contributed to the IRA when you earned the money, only when you withdraw. In the mean time, the money is growing, tax free, based on your investments. Anything inside the IRA is tax free, including dividends, distributions (from funds to your IRA, not from IRA to you), capital gains, etc. This is very powerful, when taking into account the compounding effect of reinvesting your dividends/sale proceeds without taking a chunk out for taxes. Consider you make an investment in a fund that appreciated 100% in half a year. You cash out to reinvest in something less volatile to lock the gains. In a regular account - you pay taxes when you sell, based on your brackets. In the IRA you reinvest all of your sale proceeds. That would be ~25-35% more of the gains to reinvest and continue working for you! However, if you decide to withdraw - you pay ordinary rate taxes on the whole amount. If you would invest in a single fund for 30 years in a regular account - you'd pay 20% capital gains tax (on the appreciation, not the dividends). In the IRA, if you invest in the same fund for the same period - you'll pay your ordinary income rates. However, the benefit of reinvesting dividends tax-free softens the blow somewhat, but that's much harder to quantify. Bottom line: if you want to plan for retirement - plan for retirment. Otherwise - IRA is not an investment vehicle. Also consider Roth IRA/conversions. Roth IRA has the benefit of tax free distributions at retirement. If your current tax bracket is at 20%, for example, contributing $5K to Roth IRA instead of a traditional will cost you $1K of taxes now, but will save you all the taxes during the retirement (for the distributions from the Roth IRA). It may be very much worth your while, especially if you can contribute directly to Roth IRA (there are some income limitations and phaseouts). You can withdraw contributions (but not earnings) from Roth IRA - something you cannot do with a traditional IRA. 529 Plans vs Coverdell ESA is a question where I provided a brief answer of the difference of these two accounts.  For your situation, I'd add that the 529 offers you a layer of protection, in that the account can remain your property with the children as beneficiaries. In other words, should your brother's fortunes change, or should the kids get full scholarships, you can change the beneficiary back to yourself, and withdraw the money (Tax and penalty, but the money is still yours.) Welcome to Money.SE. If you would like any clarification on my answer or others as they appear, just comment. From a federal tax point of view, withdrawals from 529 plans are treated as taxable unless they are used on qualified expenses: The part of a distribution representing the amount paid or contributed   to a QTP does not have to be included in income. This is a return of   the investment in the plan. The designated beneficiary generally does not have to include in   income any earnings distributed from a QTP if the total distribution   is less than or equal to adjusted qualified education expenses   (defined under Figuring the Taxable Portion of a Distribution ,   later). [...] To determine if total distributions for the year are more or less than   the amount of qualified education expenses, you must compare the total   of all QTP distributions for the tax year to the adjusted qualified   education expenses. You'll have to include them in your income and pay normal income tax on them, and also in most cases pay an extra 10% penalty: Generally, if you receive a taxable distribution, you also must pay a   10% additional tax on the amount included in income. You'd have to check on the situation from a state perspective but I'd imagine it's quite similar. The basic point is that non-qualified distributions are treated as earnings. In the US, the key to understanding the benefits of retirement accounts is to understand capital gains taxes and how they work. Retirement accounts are designed for making investments throughout your career, then after several decades of contributions, withdrawing that money to pay for your needs when your full-time employment has concluded. Normally when you invest money in a brokerage account, if the value of your investment increases, and you sell in less than a year, those investments are considered short-term gains and taxed as ordinary income. If you hold that same investment for over a year, the same investment is taxed at a lower capital gains rate (depending on which tax bracket you are in during that year, the amount due could be up to 20%, but much lower than your regular income tax rate). When you place your money in a retirement account, you are choosing to either pay the tax due on the income when you put it in the account, or put the money in tax free and pay the tax when you withdraw (these are called tax-deferred accounts). When you have money invested several decades, the raw dollar amount increases greatly, but inflation is also reducing the value of those dollars. Imagine you bought some bonds that payed 4% over 40 years, but inflation was 2% during those same years. When you sell those bonds 40 years later, you will owe capital gains on the entire gain even though half of the gain came from inflation. Retirement accounts allow you to buy and sell according to your investment needs and goals without any consideration about whether the gains are short-term or long-term, and they also allow you to pay taxes just once, either when you put it in, or when you take it out, with no worries about whether you're paying taxes on inflated gains. "Investopedia probably should change the wording to ""tax free"" since all of the gains in a Roth IRA can be withdrawn without any additional taxes at retirement time. Tax deferred should only refer to the gains in a traditional IRA. ""Tax advantaged"" might be a reasonable term to use in both cases." "1) When it says ""an investment or mutual fund"", is a mutual fund not   an investment? If no, what is the definition of an investment? A mutual fund is indeed an investment. The article probably mentions  mutual funds separately from other investments because it is not uncommon for mutual funds to give you the option to automatically reinvest dividends and capital gains.    2) When it says ""In terms of stocks"", why does it only mention   distribution of dividends but not distribution of capital gains? Since distributions are received as cash deposits they can be used to buy more of the stock. Capital gains, on the other hand, occur when an asset increases in value. These gains are realized when the asset is sold. In the case of stocks, reinvestment of capital gains doesn't make much sense since buying more stock after selling it to realize capital gains results in you owning as much stock as you had before you realized the gains. 3) When it says ""In terms of mutual funds"", it says about ""the   reinvestment of distributions and dividends"". Does ""distributions"" not   include distributions of ""dividends""? why does it mention   ""distributions"" parallel to ""dividends""? Used in this setting, dividend and distribution are synonymous, which is highlighted by the way they are used in parallel. 4) Does reinvestment only apply to interest or dividends, but not to   capital gain? Reinvestment only applies to dividends in the case of stocks. Mutual funds must distribute capital gains to shareholders, making these distributions essentially cash dividends, usually as a special end of year distribution. If you've requested automatic reinvestment, the fund will buy more shares with these capital gain distributions as well."