Brokerage Account Signup Bonus Taxable Or Not?

I’m following the lead from my own post Huge Bonus Offers From Brokers: Fidelity, Schwab, TD Ameritrade, ETrade, Merrill Edge. Although I’m satisfied with the service of WellsTrade brokerage account provided by Wells Fargo Advisors, the huge bonus offered by its competitors is just too good to pass up.

I moved my brokerage account from Wells Fargo to TD Ameritrade because TD Ameritrade pays a signup bonus of up to $1,000. An in-kind transfer does not involve any buy or sell. I still have the same investments. They are just held at a different place.

The transfer completed in less than 10 days. TD Ameritrade paid the promised bonus into my account on the same day the transferred assets arrived. The instant gratification felt really good. Now, is this bonus taxable?

As with almost everything, the answer is it depends.

The bonus is treated the same way as interest earned in the account. If the account is a regular taxable account, the bonus will be taxable. I expect the year-end 1099 will include this bonus.

If the account is a traditional IRA, there won’t be a 1099 and therefore it won’t be taxable in the current year. But because the bonus stays in the IRA and it grows tax deferred, eventually when your withdraw the money after you retire, the money will be taxable at that time.

If the account is a Roth IRA, the bonus isn’t taxable either now or in the future. Score!

So far so good with TD Ameritrade. It offers commission-free trades on 101 ETFs. These are good ETFs. 32 of them are from Vanguard; 47 from iShares. All my current ETF holdings are on the list. All the ETFs that I potentially will invest in are on the list. Therefore even though TD Ameritrade isn’t as open-ended as Wells Fargo where online trades are free for everything, I don’t foresee paying any commission on the trades that I will make at TD Ameritrade.

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Comments

  1. serbeer says

    Yes, Ameritrade is good, their commission-free ETF list is pretty complete but missing VPL. Since I use it in combination with VGK (which is on the list), I keep paying for that… Yes, I could use VEA and I do but when I need to rebalance Europe vs Asia or when I TLH and need to swap VEA for something else, VPL+VGK combo cannot be beaten.

    Why on earth would they offer VGK but not VPL? Sigh.

  2. BN says

    To get the $1,000 bonus, you must have had a pretty sizeable IRA. How does the bonus offer compare to the ER savings of 1 year (I assume you must keep the money with TD Ameritrade for 1 year?) if you had just moved your IRA to a Vanguard brokerage and invested in similar ETF’s?

  3. Harry Sit says

    BN – You can hold the same Vanguard ETFs at TD Ameritrade as you do at Vanguard. No ER savings whatsoever if you move to Vanguard brokerage.

  4. BN says

    Would you advice taking my IRA out of Vanguard to TD Ameritrade just to get the $1,000 (non taxable) bonus? Is there something else I’m missing?

  5. Harry Sit says

    BN – It depends on what you currently have in your IRA and what you will invest in. If you have Vanguard open-end mutual funds or a mix of Vanguard open-end mutual funds and Vanguard ETFs, it’s probably not a good move because buying or selling Vanguard open-end mutual funds isn’t free at TD Ameritrade. If you only have Vanguard ETFs in a Vanguard *brokerage* account and you will only buy Vanguard ETFs on the commission-free list at TD Ameritrade, I don’t see why not. They are the same ETFs.

  6. Financial Advice for Young Professionals says

    This situation doesn’t apply to me, but I don’t like seeing rewards like this being taxed. I know there was a lot of discussion this year because citibank sent out some 1099′s for rewards points that were granted as the result of opening checking/savings accounts. Personally, I’m against any type of 1099′ing on rewards points because their redemption rates are so variable.

    I also got a nice mix of airline rewards, gift cards, and cash tax free last year from signing up for various cc’s so i definitely don’t want to be taxed on that!

  7. Steve says

    It never occurred to me that the bonus would be deposited directly into the account, meaning you could get an extra “contribution” to an IRA. But it makes sense – it’s basically interest. That’s why it is taxable (when it’s not in an IRA); it is interest, a return on your investment.

    Generally points earned on purchases (e.g. cash back or air miles from a credit card) are not taxable because they’re considered a discount or rebate on the purchase.

    Still, while “up to $1000″ sounds nice, the amounts you have to transfer to get that money is beyond what most people have lying around. And those that do have that much, have probably better things to with their time than transferring money around.

  8. Harry Sit says

    Steve – Many that do have that much (> $250k) are retired after saving and investing for many years. They have time and they are happy to earn $1,000 for spending a little bit of time. It’s certainly worth it for me. I hope they keep doing this every year.

  9. Janice says

    The cash back and sign-up bonuses are always taxable regardless of whether a 1099 is generated. Many companies will not generate a 1099 for small amounts, but you’re still obligated to report the income.

  10. dan says

    I can’t find the link offering $1000. All I find at their website is an offer for $600 if I fund with $250K. Can someone provide the weblink?

    It is not clear to me when reading the fine print that moving to your new account bonds or equities is accepted as “funding” Moving cash is not interesting. but moving $250K of bonds from my IRA is.

  11. Harry Sit says

    dan – The link is in the previous post linked in the first sentence of this post. Yes I can confirm moving securities counts as funding for the bonus.

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