Go to
www.photobucket.com
Make an account
Upload the desired picture to the album but next to upload there is a link called options. Click it and it gives you the size you want to upload it as (Avatar size, Thumbnail size, regular size, etc...)
Click avatar size upload and it automatically resizes the image to fit. Use the second link down (Direct link) and copy that address into the field under your custom avatar setting and it should work.
This is how i do mine.