Combining bank accounts is a big step for any relationship, whether you’re spouses, a parent and child, or business partners who need to share the same account. A joint bank account can simplify cash flow in many ways, but it’s not something to undertake on a whim. It may complicate your tax obligation, and it can raise questions of ownership in light of a dispute or incapacitation.
If you’re considering opening a joint bank account with someone, make sure you know what it means for your money and for your relationship. Let’s dive into the details of how it all works, and see if it’s the right fit for you.
Understanding joint bank accounts
Joint bank account rules
When you open a joint bank account you enter into a contract. “Both people on the account paperwork own the money, regardless of how much each person put into the account,” said consumer law attorney Sonya Smith-Valentine, who runs the financial training firm Financially Fierce.
Smith-Valentine also cautions that many people misunderstand the legal intricacies of a joint bank account.
“Depending on state law, a creditor of one of the joint account holders could garnish all of the money in the account to settle debts owed by that account holder,” she told DepositAccounts.com. “It would not matter that all of the deposits were made by the non-owning account holder.”
That means that if John and Jane have an account together, and John defaults on a debt, the creditor can take money from Jane’s paycheck if John has no wages for them to garnish. Jane can be negatively impacted even though it was John’s issue.
In the case of a death, things can get a little murky. The way most joint bank accounts are set up is that they have something called “rights of survivorship.” This means that one of the owners takes over control of the account if the other dies.
“Most joint accounts are set up this way. The joint account holder’s rights will often supersede what’s written in a will,” said Smith-Valentine. However, depending on your state laws and the conditions of death, that doesn’t always apply.
Divorce also complicates things. In a divorce, you’re separating assets, including your bank accounts.
“Prior to a divorce complaint being filed, a spouse can withdraw money with no problem,” Smith-Valentine explained. “Once the divorce complaint is filed, many states have restrictions on what can happen to a joint account since it’s marital property that has to be accounted for during the divorce.”
For example, some states only allow for 50% withdrawal of the accounts contents by one spouse. In other states, one spouse can clear out the whole account, and the remaining account holder has no legal recourse to reclaim the money. After the divorce, the best thing to do is close the joint bank account, and start a new account in your own legal name.
It’s important to keep in mind that funds in a joint bank accounts are really and truly combined money.
Trust is essential for two people with a joint bank account.
“If one person makes all of the deposits and the other person withdraws all of the money, there usually isn’t any recourse in the courts to get the money back,’ said Smith-Valentine.
Opening a joint bank account
The process of opening a joint checking account is very similar to opening an individual account. If you’re doing it online, select the “joint” option for the account type, and fill in personal information for both people on the account, such as birthday and Social Security numbers.
Your bank or credit union may have specific criteria. A look at the TD Bank website, for example, shows that they prefer you to open one in person. Both people must be present and should bring government-issued ID.
If you have or the person you want to open a joint account with has a negative bank account history, opening a joint bank account may be harder. When anyone applies to open a new bank account, banks and credit unions run a banking history report on them. This is similar to a credit check when applying for lines of credit.
A negative bank account history would stem from accumulating and not paying banks fees, repeated bounced checks, fraud activity or identity theft. These and other behaviors are tracked in a system called ChexSystems, which generates a bank score for each person. If you have a low score due to a history of suspicious or illegal behavior, it is possible that your application for a new bank account will be denied.
However, some banks will allow you to open an account called a second chance account. These may have high fees and fewer options, but can be a way to open a bank account.
Joint bank account pros and cons
Fewer accounts to track. “The two biggest pros I can think of would be convenience and efficiency. It reduces the amount of places you need to look for transactions and can help you manage your taxes,” said Kacie Swartz, a CFP in Austin, Texas.
Sharing a bank account means that you simplify your banking. “If you’re getting together later in life you may have a few checking accounts laying around,” said Swartz. “Many people go to joint account because it’s a fresh clean sweep.”
Higher deposit insurance coverage. A joint bank account comes with a higher deposit insurance amount as well. Individual bank accounts are insured up to $250,000 by FDIC or NCUA insurance coverage, but with two people on the account, that becomes $500,000.
Supporting dependents. If you have a convenience account, you can monitor another person’s spending and make deposits or withdrawals quickly and easily. This account could be helpful for someone with aging parents. The adult child can share their parents’ account, to help them manage money transactions. When a parent passes, a joint bank account can mean their child has access to the money right away (bypassing any legal drama).
Joint liability. There are some drawbacks to joint bank accounts. Cons to consider before jumping in are that a joint account means joint liability. If one person drains the account, or owes money to a creditor, both account holders can be held responsible. One partner might overdraw and incur fees that the other is liable for.
Desmond Henry, another CFP, cautions against opening a joint bank account with someone who is not financially responsible.
“The biggest con is if you or your significant other comes with some baggage, such as problems with creditors or still has some growing up to do with their finances,” Henry said. Since you’re liable for what happens with the account, you can be penalized for your partner’s bad habits.
Lack of privacy. Since the account is shared, there is a lack of privacy. “Especially if you were independent for long time, you might want to preserve that independence” said Swartz.
There’s also the matter of bank preference says Swartz. “Certain people like certain banks and credit unions, and that’s a very individual decision. So that (where to bank) can be a cause of disagreement.”
Closing a joint bank account
Closing a joint bank account is a fairly simple process in most cases. Generally, you don’t have to have both account holders in order to close the account. One account holder can close it. The bank may ask you to zero out the balance first, so be sure you pay attention to their requirements.
Before you close any joint account, take these steps to make it as easy as possible.
- Divide up funds equally beforehand. Especially in divorces, dividing assets and funds can become a nightmare. If possible, split the account fairly and transfer the money to a different account before closing it.
- Cancel automatic payments and transfers. If you’ve set up an autopay from the account, or an automatic transfer, cancel them before trying to close the account.
- Switch any direct deposits. In the same vein as canceling any money coming out of the account, stop any money going into it as well. Any ongoing deposits may keep the account reopened.
Right of survivorship vs. payable-on-death joint bank account
If you are closing an account because of the death of your co-owner, things can get more complicated quickly. A joint bank account is largely seen as a contract between the account holders. As such, most banks will grant the living account holder access to the account funds.
With a right of survivorship accounts, the first course of action for banks is to have the remaining account holder take charge of the money in the joint bank account. For example, with TD Bank, their assumption when one joint account holder dies is to “pay the funds to the surviving account holder.”
Bank of America also defaults to the other account holder when there’s been a death. If there is no right of survivorship, their policy is that “the surviving owner, updated signature card and the estate of the deceased would share the funds.”
Chase breaks down how they handle a joint bank account holder’s death by each account they offer in their deposit account agreement.
However, in some states, joint owners do not have survivorship rights as accounts are held jointly as tenants in common. This means that when you die, your share of the account goes to your estate, and the rest goes to the surviving owner. Check with your bankstate office to see if your state applies this reading.
A payable on death (POD) bank account is a regular account with one owner. When that owner dies, the account passes to the person they’ve designated on paper. While the owner is alive, the beneficiary has no access to the account. When the owner dies, the money passes to the beneficiary, if there is no cause for probate.
The difference between the two accounts lies in the designation. The bank account owner must purposefully designate a POD beneficiary. If they don’t, the money in the account goes to probate automatically, whereas the money in a right of survivorship accounts still goes to the joint owner.
Also, an account with a POD designation means that it may be eligible for more FDIC coverage. The increased coverage will depend on how many beneficiaries the owner names on the account. If there are five beneficiaries named on the account, the owner will be insured up to $1,250,000. In order to get this additional coverage, the beneficiary must be a person, charity or nonprofit organization, and it must be clear that the account has a POD designation on bank documents and bank records.
It’s important to note that these rules are applied at the state level and thus vary state to state. It’s possible they vary year to year, if state legislatures change the law. You should check with a licensed attorney in the state you live in for details on how this works in your state.
What if you’re not ready for a joint account?
Now that we’ve seen all the ins and outs of what a joint account means for your money, the question is: Is a joint bank account right for you?
If you feel like you’re not quite ready for one, you have other options.
Separate accounts with shared expenses: You can each have separate accounts but share responsibility of costs in your lives. For example, you can both have your name on the apartment lease and take turns paying rent from your personal accounts.
Joint cash savings: Try getting into a routine where you each save the same amount of cash for a month (maybe in a clear jar where you can see it daily) and make a decision in unison on how to spend it. This can be a good trial run for holding each other accountable to contributing to a joint account, and helps in communicating about how to spend money.
Swartz points out that there is no proof that joint bank accounts are better for your money. When it comes to money management, “there’s no right or wrong answer, because research does not show that joint bank accounts are more financially efficient,” she says.
Henry seconds that point. “I would suggest that if both parties aren’t on board to open a joint account that it’s actually better to wait and not to rush into it. Setting up an account that doesn’t give equal access and ownership rights moves you further from the goal of ‘becoming one’ with your finances.”
Opening a joint bank account is a big move, for both your relationship and your money. Take your time with the decision and make sure that you find both the right account and partner to do it with.