By: Amber Stevenson
Recently, various investing apps such as Robinhood, SoFi, and Webull have begun offering bonuses to individuals who transfer their individual retirement account (IRA) to them. The bonuses are generally based on a percentage of the amount transferred. The percentages tend to range between 1% and 3.5% which can mean quite a significant amount of “free money” to the transferor depending on the value of their account. However, it is very important that anyone considering such a transfer fully understands all of the details of the bonus including the tax consequences that may come into play.
Some of the investing apps include retention terms that must be met in order for individuals to keep their bonus. For example, some require that the transferred amount be kept in the account for 5 years and required minimum distributions do count against that requirement. In the case that the term is not met, the bonus may be required to be returned. Additionally, early removal fees from the investing app could apply, causing the returned bonus to be even more than what was originally awarded.
There are also many tax questions that must be considered. If the bonus is deposited directly into the IRA, will it be considered a contribution? And if so, will the excess contribution rules apply (resulting in a 6% excise tax) if the taxpayer contributes the maximum in addition to receiving the bonus? Will taxpayers receive Forms 1099-MISC or Form 1099-INT? It is expected that taxpayers will receive some sort of information return that will need to be factored into their tax returns and tax projections for the year of receipt. According to Robinhood, the bonuses they pay are considered interest income which means an increase to taxable income (and net investment income tax, if applicable) in the year of receipt. This also means that their bonuses will not count toward the maximum contribution for the year, so taxpayers would still be able to contribute the maximum on their own without concern for excess contributions. It is not yet known how other investing apps will classify their bonuses.
If early removal fees are charged and the fee is charged to the IRA, would the fee be treated as a withdrawal? And if the taxpayer was under 59 ½ would that withdrawal therefore be subject to the early withdrawal penalty? Or would the fee be considered a nondeductible investment expense? It’s unclear at this point how any such fee would be treated.
Lastly, taxpayers should carefully consider any other fees that may be charged by the investing app to complete the transfer/rollover and/or to maintain the account. In the long run, potential fees could become more costly than the upfront cash bonus. As with any financial decision, we advise taxpayers to discuss an IRA rollover with their financial adviser and their CPA prior to initiating the transfer. If you’re considering an IRA rollover, please feel free to contact us to discuss the tax issues involved in your particular situation.
