Team Riku! Sorry, I stole some of your avatar swag. I made my own, but I saw you up it up first. Hopefully no hard feelings. I also saw your conversation with Chaser. You're right, anything over 125x125 will put a white background to anything transparent.
I have this same issue a lot as well. Are you saving the image as a PNG with a transparent background while also just slightly under the size guidelines given on the "update your avatar" page? My limitations are 200 by 225 pixels but I always have to save an image just under this size for it to work.