My Robinhood shutdown experience: Part 3, resolving my IRA transfer stalemate

I’ve been chronicling my Robinhood shutdown story over the past few months (Part 1, Part 2) as my taxable positions were liquidated and the balance in my taxable account was “refunded” to the various debit cards I’d used to liquidate my manufactured spend and manufacture debit card transactions on my high-interest checking accounts.

Where the story left off, I was deciding what to do with my traditional and Roth IRA balances: Robinhood charges a $100 outbound ACATS fee for in-kind transfers, so I planned to execute a “60-day rollover” of my balances to my external IRA’s.

The problem: a local tax withholding glitch

As they are required to by federal law, Robinhood gives you the option to withhold taxes from IRA distributions, with a default setting of 10%. They also give you the option to adjust that setting for federal taxes. This is important because, to execute a penalty-free 60-day IRA rollover, the entire amount of your withdrawal has to be rolled over. If you don’t notice the 10% withholding, then you have to find the cash elsewhere to “top up” your withdrawal until the withheld money is refunded if and when you file your taxes.

What I found was that when withdrawing my entire IRA balance, I was unable to adjust my local, DC income tax withholding. That would have amounted to a roughly $800 interest-free loan to the government of DC, since I’d get it back when my tax return is processed next year.

Crisis: ACATS doesn’t work

Having given up on the straightforward route, I submitted a transfer request through Merrill Edge to move my IRA balances to my existing IRA there and a new Roth IRA (prepared to pay Robinhood’s $100 ACATS fee).

Each time, the request was rejected, and each time, I escalated my complaint higher, but the only thing Merrill could tell me was that Robinhood was rejecting the transfer because my account was “frozen.”

Since it’s impossible to communicate with Robinhood employees once your account has been shut down, I found that it was necessary to get creative.

Resolution: partial IRA withdrawal

You may recall that I wasn’t able to adjust my DC income tax withholding when withdrawing my entire traditional and Roth IRA balances.

In a fit of inspired pique, it occured to me to see whether I could withdraw less than my entire balance. And, to my very pleasant surprise, the withdrawal of all but a few cents in each account sailed through without even prompting me for withholding information.

The total amount deposited was, however, reduced by the amount of my 3% Robinhood Gold IRA “match.” I wasn’t sure how they would handle this in advance, but I believe they only took out the nominal amount of the IRA match, not any gains I made on the match.

Unresolved: tax treatment

People in the travel hacking community do a lot of shenanigans that generate a lot of tax documents, some of which are useful, and some of which are not useful. As a consequence, there is a very pervasive belief, very much including people who should know better, that tax documents generate tax liability.

This is not true. Underlying activity, whether or not it is reported on documents filed with the IRS, is what generates tax liability. In my case, I fulfilled all the requirements of a 60-day rollover (it was, in fact, a 2-day rollover), but I’m perfectly certain that Robinhood and Merrill Edge will both report me making the same contribution to two different IRA’s. And if the IRS had any enforcement staff left, they might give me a call or send me a letter telling me I’d exceeded my annual contribution limits or owe penalties on my early distribution, or both.

But this is the important thing: I haven’t, and I don’t. Tax paperwork is designed, in the best case scenario, to help you fulfill your tax obligations. But tax paperwork doesn’t create tax obligations. Only the underlying economic activity does, whether it generates tax paperwork or not.