Using the Inheritance
Rob has a question for Dave about an IRA that he received from his late father.
Dave's ANSWER: If it's a traditional IRA, the mandatory distribution when it comes out is taxed. There is no penalty, but it's going to be taxed at your rate. So it's just money that you got. That's the way I would look at it, rather than where it came from. That isn't as important as the fact that this IRA will pay out about $1,600 in your hand after taxes every year.
Now, with that stream of income per year, what are you going to do with it? I would apply it wherever you are on your Baby Steps if you've got debt on anything but your house. If you are on Baby Step 2, you'd be working your debt snowball, so you would apply it to your smallest debt.
If Baby Step 2 is clear and you're debt-free except the house, then make sure you have your emergency fund of three to six months of expenses funded. If that's done, then go to Baby Step 4 and use that money to help you fund your Roth IRA up to 15% of your income. If that's done, then we move on to Baby Step 5, which is the kids' college fund. If that's done, then we go to Baby Step 6 and throw it at the house debt.
Wherever you are in that is what I would use the money for. I would take the minimum because you don't need it. The exception would be if you are in Baby Step 2 or 3. I'd pull out enough money to knock out those two and just pay the taxes on it. It sounds like there is a substantial amount in there.
You say there is $77,000 in there and you have $40,000 in debt, not including your home. I tell people to not cash out retirement to pay off debt, and this inheritance is the same as an IRA of yours. Even if you didn't put the money in it, it's still in your name. I would take the minimum distributions and work my Baby Steps.