Opening a joint bank account might seem like a good idea. Whether you're pooling money with your parents or opening an account with roommates so you can pitch in for rent and expenses, joint accounts are easy to use. However, a joint account can also expose you to tax liability, legal liability and the threat of losing your money.
Withdrawing all of the funds at any time is the right of everyone signed up for a joint account. If you and two roommates each put $400 into the account toward rent, your third roommate can walk into the bank, take out the $1,200, add $400 of his own and pay the rent. He can also take the $1,200 and go to Las Vegas and the bank can't stop him. Remember, everyone with access to the account has the same privileges.
Sharing an account also means sharing liability. If one account user writes a bad check, every other user is responsible for it as well. Furthermore, if one account holder gets into legal trouble it can spill over onto all of you, depending on your state's laws. You might be able to get your money back if this happens but it will take time and effort.
Joint bank accounts also carry two forms of tax liability. The first is that someone will usually receive an Internal Revenue Service 1099 form from the bank for any interest earned. They could end up having to pay all the taxes on the interest even though everyone with account access benefits from it.
Joint accounts can also be subject to gift taxes. The IRS limits how much money you can give someone in a year without tax. Suppose you add someone to an account with a balance that's more than twice the annual tax-free gift limit ($14,000 at the time of publication) and they withdraw it. They are receiving a gift that has to be reported even if tax doesn't have to be paid on it.
Signing up for a joint accounts may not be necessary. If you need to pool money with roommates, you can have everyone give it to one roommate so she can write a single check. To make sure your money goes to someone in particular when you die, set up a "pay on death" order that automatically transfers it to them. If you must have a shared account, you may be able to have your bank require signatures from every owner for withdrawals.
- ACTEC Foundation: Joint Accounts: Dangers and Alternatives
- Bankrate: Risks of Joint Bank Accounts
- Legal Services for the Elderly: The Hidden Dangers of Joint Bank Accounts
- Woodcraft Tax Notes: Who Pays Tax on Joint Bank Accounts?
- IRS: In 2013, Various Tax Benefits Increase Due to Inflation Adjustments
- Consumer Financial Protection Bureau. "I Have a Joint Checking Account. The Other Person Closed the Account Without Telling Me. Is That Allowed?" Accessed Feb. 26, 2020.
- Consumer Financial Protection Bureau. "I Have a Joint Account With Someone Who Died. What Happens Now?" Accessed Feb. 26, 2020.
- Nolo. "Bank Levies on Joint Accounts (Spouse)." Accessed Feb. 26, 2020.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.