Perhaps nothing stresses a relationship more than money. Financial arguments are the top predictor of divorce, according to a 2012 study out of Kansas State University. Different spending habits, salaries, and savings goals can lead to all sorts of misunderstandings and arguments, and this doesn't apply just to married couples -- money can put a strain on any relationship. Mingling your money is a big deal, and sure to cause heated debate sooner or later. Is it right for you? Knowing the ins and outs of the joint bank account can help you decide.
What is a joint bank account?
Joint accounts are just like standard bank accounts in many ways: Funds can be withdrawn with a debit card, at a bank branch, by writing a check, or with an electronic transfer. There are joint checking and savings accounts available, as well as joint investment accounts and credit cards. The big difference is that multiple people (sometimes more than two) have complete access to the account, no matter how much money they contributed.
It can help to think of joint accounts as being entirely owned by each person. Anyone on a joint account can withdraw, transfer, or spend all the money in the account without the other parties' permission or knowledge.
Who can open one?
Joint bank accounts aren't just for married couples. Roommates, parents and children, and unmarried partners also may benefit from joint accounts. In these circumstances, it's likely each person has his or her own accounts in addition to the joint account, while some married couples like to combine finances completely and use only joint accounts.
What are the benefits?
Joint accounts can be useful in many ways. For starters, they can simplify bill paying for shared expenses such as utilities or rent. Joint accounts can also be used for shared savings goals, such as a vacation, wedding, or down payment on a house. With more than one person contributing, it's easier to maintain a high balance at a bank offering premium services or fewer fees based on account balances.
What are the liabilities?
Married couples can maintain separate accounts, but their money is tied together anyway. (They'll discover this as soon as there's debt, such as bills from a medical emergency.) David Weliver, founding editor of Money Under 30, explains that money earned while married is generally considered marital property and may be split equally between both parties during a divorce -- so married couples opening a joint account aren't necessarily taking on additional risk.
On the other hand, joint accounts between unmarried people can cause all sorts of trouble. For example, four roommates may open a joint account and use it to pay rent and house expenses. If one roommate gets sued, all the money in the account can be taken. Parents may open joint accounts with children who are away at school, and if the parent or child runs into financial trouble, those funds are in jeopardy. Money in a joint bank account is on the line if any one of the account holders has their wages garnished.
Communication is a must if multiple people are on an account. With several people writing checks or making online payments, it's easy to overdraw a joint account accidentally -- and if the gap is not made whole, the credit score of every person on the account is vulnerable and each can be reported to ChexSystems, which is used by banks to screen people who want to open a checking or savings account.
How do you protect yourself?
There are some things you can do to build in an extra layer of security. Many banks can set up automatic notifications to alert account holders when a balance drops below a certain amount or large transactions or transfers are made. Some banks have accounts that require every person's signature for withdrawals. (The checks even have multiple signature lines.)
Such accounts have drawbacks. Checks for deposit may be required to be addressed to all account holders, for example. And there are workarounds anyway: Money can be withdrawn from an ATM, which doesn't require a signature, and because checks are often processed without a signature being verified, it's still possible for a single account member to write a check.
What about taxes?
For unmarried account holders, there are a few ways using a joint account might cause a headache. If one person withdraws more than $14,000 -- the maximum that can be given tax-free in 2015 -- the money might be treated as a gift. The "giver," not the person who withdraws the money, may have to file a gift tax form come tax time (although he or she likely won't have to pay any additional taxes, due to a lifetime gift credit).
If interest is earned on the account, the primary account holder will get a 1099, but the account holders must decide as a group how to handle the tax burden.
How do you close a joint account?
Closing a joint account doesn't necessarily require everyone to sign off. Joint accounts at some banks can be closed by a single member. When the need for a joint account has ended, account holders should be sure to close the account or, at the very least, take all but one name off it.