RMD not removed in 2014? Here's how to correct it
If your Required Minimum Distribution did not get removed as expected in 2014, the IRS has a process to help you correct it. We all recognize there's a 50% penalty imposed on the amount that was not properly removed, but thankfully, that can be waived by following the IRS process.
As a reference, please visit the IRS.GOV website, and search for Form 5329. This form is used to correct a variety of situations that are more common than you think. There's a section for RMD errors, including missing an RMD deadline.
The good news is, by filing this form and writing an attached explanation, the IRS more often than not waives any associated penalty. If your RMD was $10,000, and for any reason it did not get removed as expected in the year required, then this form may save you $5,000. That's how important following the IRS process is for this error.
The most common reason for missed RMD removal is actually illiquidity. Most IRA brokerage accounts, even with Automatic RMD designations, will not automatically sell positions and generate cash to satisfy RMD withdrawal criteria. They simply sweep whatever cash is available to the linked non-IRA account, generate a Form 1099-R, and leave the rest up to you as the investor.
It's worth adding a date on your calendar every December to ensure you have adequate RMD cash in place. If not, it's comforting to know there's a means to self-identify any shortfall and correct it before penalties are imposed.