My father passed away recently and listed his 401K beneficiary as the oldest of 5 children (my brother) with the intention that it would get divided up evenly (which is still the plan). My brother has received the money out of the 401K (minus a large chunk of it from withdrawing it early). Is that chunk of money considered tax or will the remaining bit of it be taxed again as income for him. Also, if it is still taxed at the end of the year, and then divided up in 2013, would that division amonst the 5 children get taxed again if each payout ends up being over $5,000 per kid (would each kid then have to report it as income for 2013 and would the money be taxed for a second time). What would be the best way to divide the money and minimize multiple taxes.

Despite what your father may have stated his intentions were, what he actually did was bequeath his 401(k) to just one person. If he wanted you all to share he should have identified each of you as a beneficiary to share in equal parts. So now this account counts as income to only the one sibling who inherited it, and he will report the full amount of this income on his income taxes. Whether he will owe more federal income tax than has already been withheld will depend on his tax bracket. Also depending on where he lives he may also owe state/local income tax on the withdrawal. The good news is that he does not have to worry about paying any early withdrawal penalty, since it was inherited. In other words the amount withheld was not for withdrawing it early, but rather as a down payment on federal income taxes.

If he chooses to make a gift of some or all of this to his siblings that's what it is - a gift. Gifts are not taxable to the recipient(s). However, if the amount of the gift is greater than $13K to any individual he will have to file a gift tax form to document it. It's highly unlikely that he will have to pay any gift tax, but it may have an affect in later years in his estate planning, as the amount over $13K is booked against his unified gift and estate tax credit.