Q: Is the ownership of money that goes into a joint account tracked with regards to who contributed the funds into the account?
For instance, my wife and I have a joint checking account. Most of the money that goes into the account is from my retirement and some from her retirement funds. We use the money to pay for our housing expenses, yet at any time either of us can withdraw the entire balance. Does it matter?
A: Tracked? That’s an interesting question. We wonder what made you think about this.
To start, a joint checking account is an account where each of the owners in the account own and control all of the funds in the account. This means that any owner has the ability to withdraw all of the funds at any time. It doesn’t matter who put the money in or who takes the money out. For purposes of the account, any owner can deposit money into the account and any owner can withdraw all of the money from the account.
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The second important thing to know about a joint account is that upon the death of one owner, the other owner (or owners) become the sole owners of the money in the account. So, if a husband and wife have a joint account, and the wife dies, the husband becomes the sole owner of all remaining funds in the account.
The financial institution that holds those funds does not track who deposited money into the account. Once any owner of the account deposits funds, those funds become jointly owned and available for use by all of the account holders.
When you ask whether it matters who withdraws the funds and whether those transactions are tracked depends on a couple of situations. If your question relates to federal income tax issues, you should know that once the money from both of you is deposited into the joint account, you or your spouse would be responsible for any tax issues relating to where the money originated. For example, if your money came from an IRA account, you’d owe tax on the funds withdrawn.
On the other hand, if the money in the joint account is used to pay interest on a home mortgage loan, payment to charitable institutions, payments for your home’s real estate taxes, or other IRS deductible expenses, you’d want to track those expenses so that you can take the deductions on your federal income tax return.
You and your wife may have an arrangement where you each split the household costs equally. If you use your joint account for your household expenses and each of you deposit equal amounts into the account, you should have no issues.
However, we know that joint account holders don’t always deposit equal amounts into a joint account. It’s up to the two of you to keep track of your deposits into the account and the expenses paid out of the account. The two of you could calculate how much each of you has contributed in deposits and payments from time to time, and then settle up.
As we write this, we have to wonder why spouses or long-term partners with a good working relationship would deal with their money in this somewhat complicated way. It feels as though there is an easier answer. But, we also know that there are many ways for couples to handle their money. We’ll leave that issue for a separate column.
Does it matter whether housing expenses are paid out of your retirement money, your spouse’s retirement money, or a joint bank account? It shouldn’t. Unless you have children from a prior relationship and are setting up separate estates for those children (or your other heirs). In that case, you may want to make sure you are paying expenses equally.
As you use retirement funds and deposit those funds into a joint account, the real issue for you is how you get taxed on the withdrawal of retirement funds from an IRA or 401(k) account. You get taxes by the IRS on your withdrawal of those funds (and if you take money out before you are 59 1/2 you will likely also pay a penalty). If you’re paying 80% of the expenses from your qualified retirement account, then you would owe more in taxes than your spouse. Still, when you spend money on certain household expenses such as property taxes, you are entitled to deduct up to $10,000 that you paid toward local real estate taxes.
If you have questions on withdrawals from your IRA or 401(k) account to pay for your household expenses, you might want to talk to a financial advisor. When it comes to issues around paying taxes (and which account will be best), talk to an estate attorney or tax advisor to get more detail.
(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through their website, bestmoneymoves.com.)