A reliability optimization model and algorithm for distribution system with microgrids is presented to maximumly enhance its reliability. The purpose is to maximize the reliability enhancement by network reconfiguration without increasing investment and provide policy decision consult for planners and operators. The model takes the minimal weighted combination of four indexes as the objective function, and the indexes are the system average blackout frequency, the average interruption duration, the average power supply unavailability and the average insufficiency of power supply capacity. The system security and stability limitation and operation characteristics of microgrids are taken as the constraints of the model. A reliability based heuristic switch exchange algorithm is designed to solve the model, and the Newton method is modified to adapt to the reconfiguration feature of distribution system with microgrids. The example shows that the model plays an active role in optimizing network structure, balancing load distribution and improving network reliability.