Did you recently get married, move in with a new roommate, see a child off to college or start managing a relative's finances? The change in relationship dynamics could prompt you to consider tying part of your financial lives together by opening a joint bank account. With a shared checking or savings account you'll both have complete access and responsibility for the money.
You might enjoy the conveniences a joint account offers, or you could see it as a symbolic step in your relationship with a significant other or new spouse. But before you open a bank account with someone else, consider the potential benefits and drawbacks of the arrangement.
First, here's a quick introduction to joint accounts. Individual bank accounts and joint accounts are similar in many ways. You can open a joint account with an online-only bank or at a local bank branch. However, with a joint account both co-owners can deposit or withdraw money as if it was an individual account. The account holders can also write checks, make online payments or transfers and use the account's debit cards (if it offers them) to make purchases or withdrawals.
Like many individual accounts, joint accounts may be FDIC- or NCUA-insured, for online and retail banks and credit unions respectively. The insurance, which will refund you in case the bank or credit union fails, is on a per-depositor, per-bank basis. Meaning your first $250,000 will be covered at each bank, and a two-person account will have up to $500,000 worth of government insurance.
While any two (or more) people can open a joint account, it might not always be the right arrangement for you. But let's start with a few situations where you might want to use a joint bank account.
You might want a joint account if you share financial responsibilities with someone else. Sharing a joint account could be a good option if you're married or living with a significant other. Some couples create a joint account where they deposit a portion of their paychecks and use the money to pay for rent, insurance, loans, groceries and other household expenses. Having equal access to the account can make it easier to manage your collective spending and identify savings opportunities.
You might also consider opening a joint account if you have shared savings goals, such as a wedding, vacation or down payment. It could be easier to meet minimum balance requirements with your combined savings, you'll both be able to track your progress online and some accounts offer higher interest rates the more money you have in the account.
Joint accounts also generally have rights of survivorship. If one account holder dies, the other will still have access to the account and rights to the funds. On the one hand, this could be a positive feature as it's sometimes hard for a surviving spouse to access separate accounts. On the other, the arrangement could supersede the desires expressed in a will and the surviving co-owner could claim the money against the wishes of the deceased, heirs or other family members.
A shared account could also help you care for a family member. Are you responsible for managing the finances of a family member, such as a college student, parent or grandparent? A joint bank account could help you care for relatives, whether they live nearby or in another state. With co-owner access, it'll be easy to deposit or transfer funds online and at a bank branch, pay the person's bills from the account and keep an eye on the account's activity and balance.
But beware, joint accounts give everyone full ownership of the money. No matter who makes the deposit, once money is in a joint account, each member "owns" it and can legally spend it however he or she wants. In other words, you might not have any recourse if your new roommate raids a joint account and spends the rent money on a weekend getaway.
There are some safe guards you could put in place, but those have limitations. For example, you could require both people's signatures to write a check or make a withdrawal from the bank. However, you might only be able to deposit checks into the account if they're made out to both co-owners. Also, if the account has debit cards, one person could still make withdrawals without the other's approval.
A joint account holder's debt could also spell trouble for everyone on the account. Because every joint account holder has equal rights to the money, creditors can go after the money in a joint account if they sue one of the account holders. This puts your money at risk if the other person gets sued, falls behind on bills or doesn't pay taxes.
You could also unintentionally put someone else's money at risk. If your mother adds you as a joint-account holder on her account, the money could be in jeopardy if you get sued or divorced. Some people suggest managing elder relatives' finances with a convenience account or getting power of attorney as a potentially safer alternative to a joint account.
Communication and trust are vital to managing a joint account. An open dialogue is important to successfully running a joint account. Lack of communication between joint account holders could lead to overdrawn accounts or low balances, and the corresponding fees. It can also lead to disputes if the owners have different agreements on how the money should be spent.
Some couples make an informal agreement before opening an account together. Although it won't have legal backing, you could create a rule that you have to ask the other person before spending $150 or more. Using a mobile app to check a joint account's balance before making a purchase could also help you avoid mistakes.
Bottom line: While joint bank accounts let two or more people share access to an account, the convenience of the arrangement can sometimes be outweighed by the risks it poses to the co-owners. Generally, it's not wise to open a joint account with someone who you don't completely trust. Even when you do trust him or her, having a clear understanding of the intention behind the account and how the money will be used are important to avoiding arguments and mismanagement of your joint funds.
Nathaniel Sillin directs Visa's financial education programs. To follow Practical Money Skills on Twitter: www.twitter.com/PracticalMoney
This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.