BEST use of my required minimum distributions

[Allen]

I wrote previously that my mom passed away and I inherited some money.  Some of that post was incorrect but I have a question about what I should do with the RMD.

The total amount is split into two accounts, both continued to be tax sheltered and requiring minimum distributions to me as income every year.  The total amount is $225,000 and the RMD calculator says my RMD's will start at just over $5k a year, and then go up as the accounts continue to go up, until an inflection point where the RMD's are designed to insure the accounts empty when I am expected to die.

For the first several years, this extra income will still allow me to stay in the 15% tax bracket.  I am married and we max out my 401k, two IRA, and an HSA plus standard deduction, and three exemptions (including our daughter).  My mortgage is $144k at 2.75% with 14 years left.  We contribute to a 529 for my daughter, although our current contribution rate isn't enough to fully pay her expected tuition.

Since I'm already maxing out all my tax sheltered options anyway, it seems that my choices are to save it in a taxable investing account, or to put extra into my daughters 529, or to put it towards my mortgage.

The mortgage option seems like a bad idea.  529 seems iffy because I would be locking the money away.  It seems like the smart choice is to have vanguard just pay the RMD directly into a taxable vanguard account.

Am I missing options? 

[Trudie]

I would ask yourself in what way this money will make a difference in your life now, then direct it toward that.  Would putting it in your daughter's 529 remove a financial stress?  Would throwing it at your house ease a source of strain?  What goal(s) would you like to achieve with the money?

You might consider -- as I have done -- not paying off your mortgage directly but setting up an unqualified "sinking" fund for this purpose.  Thus, you have flexibility for that money if you should need it (and will achieve gains) but can feel good that you're paying off the mortgage.  (This year my sinking fund will increase until it meets my outstanding mortgage balance and I won't write a check, but can rest well knowing that I have the safety net.)

Assuming you have maxed your tax deferred options, I would invest it in a taxable nonqualified index or EFT.  If you're concerned about taxes, explore tax exempt bond funds.

[seattlecyclone]

The mortgage gives you a guaranteed 2.75% return on your money. You're likely to do much better with taxable investing, though of course there's no guarantee. The 529 could be a good way to have at least part of the money get market returns without being taxed again, though don't contribute so much that you end up with more in the account than you actually want to spend on your kid's education.