An Easy Guide To Understanding How Joint Bank Accounts Work
You might be somewhat taken aback by the concept, but joint bank accounts are relatively easy to understand and operate. If you think about it, there are various situations for which a joint bank account makes perfect sense, as in the case of couples managing their bills together, youngsters whose parents supervise their account, elders who need help with financial management, or business partners who use a shared business account.
So how exactly do joint bank accounts work? That’s what we’re going to discuss in this article.
How Do Joint Accounts Work?
Joint bank accounts work in pretty much the same way a normal bank account does. If you open a joint checking/current account, you’ll be able to write checks and use a debit card for the money in your account. Simply put, a joint bank account is just a normal bank account with an exception of having more than one owner and user. It comes handy in situations where two or multiple people need to access the same amount of money for expenditure or management. If you open a joint savings account, you can save your money while generating interest from the amount in your account. The main difference lies in the fact that there is more than one person who has access and can manage the account. In a joint account, the deposited money belongs to both or all owners equally. All owners can have debit cards and checkbooks, make purchases, add, and withdraw funds freely from the account.
Some banks may appoint one of the users as the primary account holder. However, that still doesn’t change the fact that all users equally share the amount of money in the account, regardless of who deposited how much. Although a user won’t be able to remove another account holder without their consent, they may be able to close the account. One account holder may even withdraw the entire balance on their own, although there are a few banks that can stop them from doing so.
How to Open a Joint Bank Account
Most often, the requirements for opening a joint bank account will be similar to that of opening a normal account. You’ll need to fill in the personal details of all account holders in an application, in addition to providing proof of residence and identity, such as utility bills or a driver’s license. Most banks will also require the presence of all account holders, which is often the best course of action. That’s going to be useful, especially if you want to discuss particular details around account access and ownership that are different from the standard industry practices. Taking a few precautionary measures is never a bad thing, especially if it includes other people having free access to your money.
Benefits of a Joint Bank Account
There are multiple benefits to opening a joint bank account, the most obvious one being its convenience. A joint bank account holds the money in one place for all parties to access and manage. That’s extremely practical in a plethora of situations, such as couples managing their household, business partners managing their business accounts, parents supervising their kids’ financial situation, or children helping their aging parents with their financial needs.
When you take a closer look, you’ll find there are even more benefits to opening a joint bank account. For instance, sharing money can allow couples to meet the minimum requirements to enjoy benefits, rewards, or lower interest rates on loans. It may even double the amount of FDIC or NCUA insurance coverage. In a normal account, the insurance coverage amounts to $250,000 for the account holder, but that amount becomes $500,000 in case of a joint account – $250,000 per account holder.
Drawbacks of a Joint Bank Account
As is the case of sharing property, sharing an account with others means that their behavior will often reflect on you too. If they use the money recklessly or irresponsibly, you’ll have to put a stop to their behavior or you’ll suffer financially. Moreover, their issues will become your issues. If an account holder is in debt, their creditors can seize all the money in the account without any regard to the other account holders. You may have some legal avenues to protect a share of the balance, but the process is just too time-consuming and costly to be called a good solution.
On another note, joint bank accounts can complicate various procedures, such as divorce, taxes, and benefits. All account holders will equally pay taxes on the account, and they may also be liable for paying taxes on the earned interest in a savings account. If any account holder withdraws an amount that exceeds $14,000, the IRS can consider it a gift and you’ll be liable for paying gift tax. Joint accounts can also complicate the divorce process, and the severity of the complications can vary greatly according to the state’s laws.
Finally, the balance in a joint account can reduce your eligibility for various benefits. Simply put, a joint account makes it look like you have all the funds in the account, exaggerating your personal assets beyond what’s real. As such, it may interfere with your eligibility for benefits such as financial aids, scholarships, or other programs that review the financial situation of individuals.
What Happens if a Joint Bank Account Holder Dies?
Most joint accounts operate on the right of survivorship: if one account holder dies, the remaining funds will be divided among the surviving account holders equally. However, some joint accounts may operate under the “tenancy in common” rule, which allows an account holder to appoint an estate who’ll receive their share of funds, in case of passing away.
As you can see, there are as many benefits to opening a joint bank account as there are drawbacks. As such, deciding to open a joint bank account needs a considerable amount of thinking, after which all parties should reach and abide by some ground rules. Most importantly, make sure you can absolutely trust the partners you choose to share your money freely with.
