Saving for retirement in a tax-deferred account – such as a 401(k) or traditional IRA – can be a smart way to minimize taxes while you work. Your initial contributions are tax deductible and you will only have to pay income tax once you start making withdrawals.

Because Uncle Sam wants these taxes as soon as possible, however, you will have to start taking required minimum distributions (RMD) before age 73 – even if you’re still working or don’t need your savings yet.

Failing to take your RMD by the end of the year could prove costly, as the IRS may impose a 25% penalty on the amount you didn’t withdraw. The good news is that rather than just withdrawing your money and leaving it in a checking account, you can reinvest your RMDs to continue generating returns on your investments. But there are a few important things you need to know first.

Image source: Getty Images.

1. You can only invest in certain accounts

If you reinvest your RMDs, you cannot put that money back into a tax-deferred account like a 401(k) Or Traditional IRA. In some cases, you can invest it in a Roth IRA (which is not subject to RMDs), but there are some tricky caveats.

Technically, when you contribute to a Roth IRA, you can only invest earned income, such as a salary or salary from contract work. If you are retired and living off a pension or other passive income sources, this will likely prevent you from reinvesting your RMDs in this type of account.

However, if you are still working, you can take your RMD but then invest the same amount of earned income in a Roth IRA. Keep in mind that this is different from a Roth conversionwhich is strictly prohibited by the IRS.

Perhaps the simplest approach is to reinvest your RMD in a taxable investment account. There is no age requirement for this type of account, so you can leave your savings there for as long as you want until you are ready to withdraw.

2. Consider accepting in-kind distributions

In some cases, you can choose to withdraw your RMDs and then manually reinvest the money elsewhere. But if you want to transfer your RMD directly to another account, you can make in-kind distributions.

With an in-kind distribution, your financial institution can transfer your RMD from your retirement account to a taxable investment account without you having to withdraw the money first. Not only will this simplify the process for you, but it will also keep your money invested.

If you withdraw your savings and reinvest them later, you will miss at least one day of the market. While this doesn’t mean the end of the world for your investments, it could hurt your income. If you are able to accept in-kind distributions, you can be sure you are maximizing the potential of your money.

3. Pay attention to your asset allocation

If you reinvest your RMDs in a taxable brokerage account, you’ll likely have many more investment options than with a retirement account such as a 401(k). This can be a good thing because it will give you more control over your financial future. But if you invest too aggressively, your retirement could suffer.

Your asset allocation refers to how your money is allocated between higher risk investments (like stocks) and lower risk investments (like bonds). While everyone’s preferences are different, in general, older adults should lean more toward conservative investments to protect against market volatility.

If your asset allocation is aggressive, your portfolio may take a hit during periods of volatility. This isn’t necessarily a bad thing, provided you can give your savings several years to recover. But if you plan to withdraw that money within a year or two, investing too aggressively could put your retirement at risk.

Reinvesting your RMD can be a smart way to maximize your income and strengthen your nest egg, but the right strategy is essential. The more prepared you are now, the better off you will be on the road.