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.

Hacking business travel: the good, the bad, the ugly

Last night I was chatting with a friend who's going to be in town next month for a work conference. Even in my spare time I'm always trying to help people save money, so I quickly checked whether I could offer him a better rate than what he'd paid for the conference hotel. I offered to book the stay for about half of what he had reserved the same room for, and then he asked the fateful question: "will the hotel still give me a receipt?"

Most people travel mostly for business, and business travel is expensive

Loyalty programs have a fundamental genius in their core value proposition: direct your company's travel business to us during the week, when hotels and airlines are engaged in a cutthroat competition, and we'll give you free flights and rooms on the weekends, when we're empty.

Credit cards directed at business travelers have a similar premise: use our product, instead of our competitor's, for your reimbursed business expenses and we'll share our cut of the transaction fees with you.

The travel hacker would ideally like to complete this circle by redeeming loyalty currencies for his reimbursed business expenses, thereby monetizing his points balances precisely when those points are most valuable.

Taxes make hacking business travel difficult

The core problem with hacking business travel is taxes: taxes make business travel cheap.

The marginal federal tax rate on a self-employed person is between 14.13% and 50.93%. That means a self-employed person who pays for travel in cash already gets a huge discount off retail simply by excluding the cost from her self-employment income. A nominal 3 cent-per-point redemption therefore becomes a 2.58 cent-per-point redemption for someone in the lowest tax bracket, and a mere 1.47 cent-per-point redemption for a self-employed person in the highest federal income tax bracket. Accounting for state income taxes would make the situation correspondingly worse.

For employees, the situation is similar. Even if you were able to negotiate with your employer for higher pay in exchange for making your own travel reservations (I'm not even sure this arrangement would be legal), the increase would have to be higher than the retail value of your travel expenses to account for federal and state income taxes.

But we think outside the box around here, so here are three approaches to hacking your business travel: the right way, the wrong way, and the illegal way.

The right way: just ask

If you work at a company where travelers book their own travel and are later reimbursed, then you could simply ask your supervisor or boss whether you could redeem miles and points for your travel and be reimbursed with cash. The human resources and accounting departments would probably have to sign off on the idea, but at a small company those might be the same person, and they might agree.

They also might not, so you have to be willing to risk flat-out rejection (and potential followup questions about your sanity) to go this route.

The wrong way: spoof reservations

Another option I consider moderately unethical would be to in fact book paid reservations, print off your receipts and, if necessary, your credit card statements, then cancel the reservations and rebook the same reservations with points.

Naturally, this would only work if the travel department doesn't require, or doesn't check, that hotel folios and boarding pass ticket numbers match the supporting documentation.

There are two reasons I believe this approach to be at least moderately unethical, even though at face value the outcome is identical to the "proper" method of paying cash and being reimbursed for travel expenses. The first is that I regard any technique that requires you to obscure your activity is inherently suspect. Now, we all may hem and haw and come up with circular explanations for carrying around thousands of dollars in gift cards, but the fact is that money orders are, in fact, perfectly legal to buy and use in the United States — if pressed, no one would feel the need to deliberately conceal their use of gift cards to manufacture spend.

The second reason I'm wary of this technique is the potential consequences for the travel hacker's employer in case of audit. While the travel or bookkeeping department might not bother to compare PNR's, ticket, or reservation numbers, that's precisely the kind of information an audit team might notice, or even look for. If your behavior puts your employer in legal or business jeopardy, I regard that behavior as ethically suspect.

The (il)legal way

While misleading your employer about your travel reservations may be unethical, trying to do the same thing with the IRS is an excruciatingly bad idea. If you're deducting business travel from your Schedule C or other business tax form, you'd better have supporting receipts showing what you actually paid for your travel. Redeeming miles and points, then claiming the cash value of your trips as a deduction, is a recipe for disaster.

On the other hand, it's also true that miles and points are treated as having a cash value in other situations. For example, when you win a stash of miles and points in a sweepstakes, or when they're awarded as a bonus for signing up for a checking account, you're issued a 1099-INT or 1099-MISC for the value of the points.

If you have a large enough business, and travel enough, it may be worth consulting with a tax attorney and getting some formal advice about what values you might assign to the miles and points you redeem for your business travel.

For example, if you could convince a tax attorney to advise you that Hyatt Gold Passport points are worth 1 cent each, then a 15,000-point redemption for a $400 hotel night would yield a $150 deduction, compared to a $400 deduction. Applying the same 14.13% tax rate to both deductions yields $21.20 in tax savings for the point redemption and $56.52 for the cash rate, for a total redemption value of 2.43 cents per Hyatt Gold Passport point (an out of pocket cost of $400 minus $56.52, compared to 15,000 points minus $21.20).

Again, that's an avenue that's only worth pursuing if you have a large enough business that the savings involved comfortably cover any fees you pay to your tax attorneys.