Thank you for this great information! Yes, his share is 200k, but I may have misspoke. It’s the chunk of the entire estate that he’s getting, not an IRA. I’m gathering it won’t be possible to put this chunk into an inherited IRA because it wasn’t earned income?
So if he had received all the money in an inherited IRA, he could still take out any amount (say a chunk for a house down payment) and not be penalized (just taxed on that amount)?
Short answers to your questions:
No, not possible to put anything into any form of an IRA as he isn't making any earned income. Inherited money isn't earned money. There are several forms of IRAs, but all require working EARNED income, not just taxable/simple income from investments/inheritances/etc...
And yes about any withdrawals from an inherited IRA (as long as the deceased was over 70.5 and had started taking their own required distributions) any moneys taken from an Inherited IRA are not subject to any penalty no matter what the age of the heir - and just taxed on the money as if it was income (again, like investment income, not working/earned income).
Just as a quick anecdote: I personally pay zero in tax and I live off my inherited IRA and cap gains/dividends thrown off a taxable brokerage account. That's why I'm so enthusiastic about any money that is still inside an IRA to STAY in there as an inherited IRA - it's a GREAT hybrid account that shelters you from tax and you can still take money out of as needed and if a person isn't a high spender, literally won't ever pay ANY tax again... why pay it if it isn't necessary?
IRA stands for Individual Retirement Account. There can be (technically) 2 types: before or deferred tax which is called a Traditional IRA, and the other which is an after tax (meaning it was funded using money you already paid taxes on to receive from a paid source for your work) called a Roth IRA (named for the Senator that spearheaded the creation of this type of IRA). Advantages on both sides for using either of them, but in your FIL's case none of them are accessible for creating since he isn't working at all and can't fund them using his inheritance.
If he is receiving any portion in an IRA (usually it's a traditional IRA, this is a simple question to ask about when gathering details - is it a traditional or Roth IRA that is being inherited?). He should absolutely try to ensure the steps I outlined above as that prevents the huge tax hit of being forced to take a large chunk of money at once. Besides the fact that he can't put it back into any tax sheltered account once it's out, he also will lose a large chunk of it to paying on taxes he wouldn't have had to pay if he'd just done the RMDs and take out smaller controlled amounts as needed.
It does not need to be cashed out to split between beneficiaries. I personally had zero issues getting this done at two different financial companies. It was literally, open account (on phone/internet) confirm new empty account was set up correctly as my BDA (Beneficiary Distribution Account, or BDA, is another name for an Inherited IRA). Send letter of instruction to the institution that currently held my father's IRA, stating I was a 50% beneficiary of said account (number), I would like my share transferred to my BDA account (number provided), please refer to sibling NAME's letter for the certified death certificate (sister sent it in with her letter so I just had to refer to it and her name stating death certificate was mailed in with sibling's paperwork and agent handing was coordinating so he was already aware).
If FIL is being told he has no choice and must cash out - that is absolute bull and someone needs to put the brakes on immediately because this is NOT reversible once the IRA is cashed out. Alert the institution (through the executor or attorney) that the IRA of the deceased should be split with FIL's share to go into an inherited IRA, and get their procedure for setting that up ASAP after that, each person that is named as beneficiary can then choose to cash out THEIR inherited portion, but FIL's share should be placed into the inherited IRA - proceed as I outlined above.
https://www.thebalance.com/beneficiary-distribution-account-bda-ira-4159896^another good link for basics. Whomever is in charge is trying to force a lump sum distribution, when what he should go for is the Inherited IRA With the Life Expectancy Method (another way of saying Stretch IRA).