Setup question

Assuming you are keeping your system 5.1 for audio and video:

You can use the NAD as a phonostage only by connecting it to a line level input on the AVR from the record out connection on the NAD. 

Otherwise I would consider purchasing a budget outboard phonostage. What TT/cartridge do you have?

The Ortofon red has an output of 5.5mV which would work well with the phonostage within the NAD, as well as most of the budget MM phonostages now on the market. 

Please do not take offense, but i believe the use of an AVR as amplification for a vinyl system represents a weak link, primarily due to the preamplifier stage. Therefore, if space is not a constraint I believe you might find using the NAD as a phonostage satisfactory. 

Good morning, I mean using only the phono stage in the NAD. For this you run TT into phono input on NAD, select phono as source on NAD, NAD record out into AVR line level input, select that input as source when listening to vinyl. NAD only need to be on when playing vinyl and the AVR serves for signal processing and amplification. The NAD is not hooked up to speakers at all.

I do agree with reubent regarding cost/quality of multichannel systems over 2 channel ones. Also in the fact that the NAD likely has the better preamplifier stage. My advice was made based on your wishing to add analog to an existing system using gear you presently own. 

Regarding audio for video, my thinking is that unless one has a dedicated room for theater, the added expense of extra channels doesn't represent a worthwhile return. I believe this to be particularly true considering 7.1 over 5.1. In what environment is your video/audio used?  I use a 2.1 system for video/audio in my living room (video takes precedence here).  If I could purchase a quality 3.1 integrated amplifier I would consider this, for the center channel often proves beneficial for video with some discs. Don't know of said device, so would likely have to use 3 channels of a 5.1 processor which I am unwilling to do.

I would suggest you integrate your analog source into your system as is, then try using your system as a 2.1 and 3.1 channel one for video and see/hear that experience over the 5.1 experience you now have. Then get back to us regarding your thinking.

Is the fact that you have to use the digital out from the cable box vs. your TV that big of a deal?  Are you sure you are outputting PCM digital from your TV via the optical connection? 
  

Are you playing records yet?

I agree that dialogue on movies can be lost with high impact movies. Use of a center channel speaker does improve this. A subwoofer does much toward experiencing the 'feel' of action.  One can always use a 5.1 amplifier for a 3.1 system. In your small room you might find that satisfactory. Would allow one to own better L & R speakers for audio. 

Great! For TV use get a budget DAC with optical input. What digital outputs are available from the cable box? If it has coax there are many DACs with optical and coax inputs to serve both units. 

When you say the cable box has RCA out, do you mean dual RCAs analog output or single coax digital out? 

If you intend on using the analog output on the cable box then you only need a toslink optical input DAC for your TV, once you set the TV output to digital-PCM.  Many inexpensive ones can be found on Ebay. I once used one by MUSE, cost was ~$25. Just make sure it has optical input. 

Are you still considering upgrading your speakers?

Great! Let us know how everything works out. PSB makes very good speakers. A dealer friend sold PSB so I have heard a couple models, not those you are considering. In my 2ndary system I use the NAD 326BEE integrated. I buy speakers used here on AG for this system. Buy an sell a pair about once a year, keeping two different pairs around for fun. Doesn't cost too much to explore different sonics that way. Need to know the market however.

Not to keep hounding you with questions, but I forgot to ask if you were using a subwoofer. Depending on main speakers one might not wish to use one for music, however for movie soundtracts even a budget one adds to the experience.

Good luck in your speaker quest, and hope the DAC proves out for TV purposes.   

With music one should not hear the sub, the bass extension yes but not the sub, at least not to know where it is located. 

Enjoy!