Advertiser Disclosure

Strategies to Save

How a Joint Bank Account Works — And Why You Might Want One

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

What is a joint bank account?

A joint bank account is an account owned by two or more people allowing each of the owners to make deposits, withdrawals and other decisions. This could help make it easier to manage shared bills, meet a bank’s minimum account balance requirement, qualify for a higher interest rate or help reach a joint savings goal.

You don’t have to be married or even related to have a joint account depending on the type of account you choose. In this story, we’ll explain all the different types of joint bank account options you have, the rules you should know about and how to choose the right account for your needs.

Types of joint bank accounts

In most cases when you open a joint account you will have to select the subtype, which some banks may refer to as “titling.” A subtype dictates how the account will be handled when an owner dies, gets divorced or can’t make decisions on their own.

Many of the joint account types work similarly in that each owner has equal access to the funds. The key differentiator is what happens when one of the account owners dies — most importantly, and whether or not the funds avoid the probate process. Probate is the legal process of winding up a person’s estate after his or her death, said Atlanta-based attorney, Sydnee Mack, Esq.

Probate can be a lengthy and costly process, and one that most people try to avoid. According to the American Bar Association, the probate process could take six to nine months to settle, with larger more complex estates taking longer.

Below are some of the subtypes you may run into, what they mean and the differences between them:

Joint Tenants with Right of Survivorship (JTWROS)

This account can be opened for two or more people and is the most common joint account option. Most banks, credit unions and even investment firms offer this option. Usually the account holders are married but this is not a requirement to open or maintain this type of account. This option is also common for adults taking care of their aging parents. When an account holder dies, the remaining portions pass on to the other account owner(s) and do not go to probate.

Joint Tenants in Common (JTIC)

Similar to JTWROS, the joint tenants in common account option gives multiple users equal to access to the account. The key difference here is what happens when one of the account owners die. Instead of the account automatically being split among the other owners, the deceased account owner’s portion will go to their estate and could be subject to the probate process.

If you’re looking to avoid any estate and probate issues, you could add a payable-on-death option. This will allow the funds to avoid probate and go directly to named beneficiaries.

Tenants by the Entirety (TBE)

Tenancy by the entirety is a Joint Tenants with Right of Survivorship account but with additional protection, explained Courtney Richardson, a Philadelphia-based tax attorney and founder of The Ivy Investor. The tenants by the entirety option is only available for married couples.

“It’s meant to protect the marital assets from outside creditors because each spouse completely owns the property,” she said.

Because each spouse individually owns 100 percent of the property, as opposed to a 50/50 split like JTWROS, it is generally exempt from judgments, liens and other collection methods when one spouse is sued. When one spouse dies, the property goes directly to the other spouse without going through probate.Tenants by the entirety, however, may not be available in every state.

Joint bank account rules

The various rules between each account type can vary depending on the state and in some cases your bank. Generally speaking, with every account type, each joint owner has equal right to the entire account balance. Any account owner can withdraw or deposit as much as they like, even without the approval of the other joint owner. It is important to check with your state’s local laws; as mentioned earlier, not every state offers tenants by the entirety option.

Also, if you’re married and live in a community property state,  the rules could be very different. In most cases, if you have a divorce in a community property state with a joint account, the money is divided evenly, regardless of how much each person contributed. One of the only ways to circumvent this in a community property state is to keep the accounts separate and enter a prenuptial agreement. In both cases, you should contact an attorney in your area.

Here are some questions you should get answered before you open a joint account.

Questions for the bank:
What happens if I no longer want to be on the account with the other person(s)?
Are there any additional fees for holding a joint account?

Questions you should ask yourself and the other joint owner(s):
What are our goals for this account?
What are the rules for spending and withdrawing from this account?

Opening a joint bank account

The process for opening a joint bank account is nearly identical to opening an account for yourself. You will need the basic account opening information for all account owners such as Social Security numbers, physical address and email address. Most banks also require that each account owner is present to sign any documents. This process generally applies no matter which account title you choose.

Joint bank account pros and cons

Pros:

  • Joint bank accounts may help simplify your finances. If you and your joint owner are splitting multiple expenses, both of you could deposit the money into one account and pay the bills from that new account.
  • A joint bank account may also help you save on fees. Many banks require a minimum balance or a monthly direct deposit to waive monthly fees. Combining your funds may allow you to stay above the minimum balance easier; if you don’t have direct deposit but the joint owner does, this may qualify you to avoid the fee.
  • Also adding joint owners also increases your FDIC coverage. The FDIC covers up to $250,000 per person, per bank, and per deposit type. If you have a joint account with someone, you are granted $250,000 per co-owner. A joint account with two people would have an FDIC limit of $500,000.

Cons:

  • Having a joint account could also cause some problems. If you feel your co-owner doesn’t put in their fair share, it may cause tension in the relationship. For example: If you put in 80 percent of the money into the account and the other owner puts in only 20 percent, that co-owner can legally spend 100 percent of the money and you may have very little recourse if they spend in a way that you disagree with.
  • Additionally, if you enjoy financial privacy to buy gifts or spend money on personal items, know that the co-owner will have access to see and monitor everything that is going on in the account.

Finding the best joint bank account

Joint bank accounts often have the same benefits as individual accounts at most banks. Very rarely will you see a benefit such as no ATM fees or no monthly maintenance fees simply because the account has an additional owner. The easiest way to find the best account option is to look for the best individual account and open it as a joint account.

As with any account, you’ll want to look for a bank that charges very few fees (if any) with benefits that help you accomplish your goals. For most people, this includes free bill pay, no ATM fees, a large number of ATMs, online account access and a low minimum balance requirement. If you’re looking to open a joint savings account, you might also look for a high interest rate. You can begin looking for the best bank accounts here.

Closing a joint bank account

The process for closing a joint bank account will vary by bank, though it is typically straightforward. However, if you are married and you’re closing the account due to divorce, the process could be different, especially in a community property state.

Most banks will allow one joint owner to close the account while others may require all account owners to be present to dissolve the account. Just like a regular bank account, you’ll want to make sure there aren’t any pending automatic bills that are still attached to the account or any outstanding checks. These could trigger the account to stay open, and you could be hit with a fee as well. How the money is split between joint owners should be discussed in advance to avoid any confusion and strain on the relationship.

Joint bank account alternatives

Due to different spending habits and financial responsibilities, joint accounts aren’t for everyone. If a joint account does not work for you, you may want to consider a linked account. Linked accounts are tied together at the same bank but owned individually. This allows funds to be transferred between people more quickly while still maintaining your independence. You will need to check with your bank for their specific rules on which accounts can be linked and how many can be linked at one time.

A convenience account may be a fitting option for those who may be taking care of older family members. Convenience accounts grants someone the ability to write checks, pay bills and perform other banking functions for the account holder, according to the legal, regulatory and business company LexisNexis. These accounts do not offer a survivorship option and the additional person added to the account is not a co-owner. When the account owner dies, the money goes to the estate and not the convenience signer. The option isn’t common and is not available in every state. If it is an option in your state, you may want to speak directly with the bank manager since these accounts are so rare.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Kevin Matthews II
Kevin Matthews II |

Kevin Matthews II is a writer at MagnifyMoney. You can email Kevin here

TAGS:

Advertiser Disclosure

Strategies to Save

How to Choose a Financial Planner

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

How to choose a financial planner
iStock

As you age, your financial needs tend to become more complex. This is often a result of taking on more responsibilities like having children, taking care of aging parents or owning a home, all while managing your own career, student loan debt and retirement savings. Naturally, it can be overwhelming to create a plan, update it and monitor it while maintaining a busy schedule. That’s where hiring a financial planner can be valuable.

What is a certified financial planner?

Financial planners can help guide you through complicated financial situations and use their expertise to help make tough decisions and manage your emotions. A financial planner may have a variety of qualifications or certifications, but one of the most widely known and accepted is the Certified Financial Planner (CFP) designation.

The designation was created in 1985 by the Certified Financial Planner Board of Standards (CFP Board) to promote “the value of professional, competent and ethical financial planning services, as represented by those who have attained CFP® certification.” CFPs must have have between 4,000 and 6,000 hours of experience, maintain high ethical standards, complete a rigorous set of education requirements and pass the CFP exam.

Those who have obtained the designation have mastered several key areas of financial planning including: retirement planning, income taxes, investment analysis, estate planning, ethics and insurance.

What does a financial planner do?

As mentioned earlier, financial planners help guide you through some of life’s most challenging financial decisions. When doing this, most financial planners will generally perform the following set of steps with each client. For many planners, this entire process could occur over several meetings and will not be completed in one sitting.

First, the planner will gather information and key details about your financial situation. This often includes a discussion about where you are financially and where you plan to be. A planner may also ask for some documents, including tax returns, any investment statements, trust and insurance documents. Next, the planner typically analyzes the data and determines whether there are any changes that need to be made and will present their findings to you.

After discussing the data and potential changes, the next step is implementing the items in the plan. Depending on the scope of your financial plan, this could be done in one meeting or over several meetings.

Lastly, you and your financial planner will typically agree on how often to monitor the plan and make changes. You may re-evaluate the plan every year or once a quarter, depending on the plan’s depth and complexity. However, most planners ask that you come in when major life changes occur like getting married, having a child or a experiencing a significant change in income.

The challenges in choosing a financial planner

It can be tricky to pick a financial planner, including finding someone with the right credentials and experience at a cost you can afford. In the following sections, we discuss some of the biggest challenges consumers face when looking for a financial planner.

The difference between a financial planner and a financial adviser

There is plenty of confusion around the term “financial planner” and “financial adviser.”

“Just about anyone can use the title ‘financial planner,’” said Dan Drummond, CFP Board’s director of communications. “There are also over 170 financial services designations out there — an alphabet soup of letters that may seem overwhelming.”

Not every person who calls him or herself a financial planner or financial adviser has the CFP designation, as the designation is optional and not required to practice. And someone who goes by the title, financial adviser can be a certified financial planner so long as they have completed the designation and are in good standing with the CFP board. CFPs will almost always have the “CFP®” behind their name.

Practically speaking, the differences between a planner and adviser are a bit more clear, though the terms are often used interchangeably. Typically, financial advisers spend the majority of their day focused on selling investment and insurance solutions to clients mostly (but not exclusively) for a commission. While financial planning is something that an adviser may do, it is often a service done on the side and not their main function. On the other hand, a financial planner’s main function is planning and less about selling products. Keep in mind that in this situation, both positions could still be called certified financial planners if they meet the board’s requirements.

Determining whether or not you need a financial planner

Whether you need a financial planner or not will be determined by the complexity of your situation.

The people in the following situations tend to see the most value in a financial planner:

  • New parents and newlyweds
    • Starting a family is not only expensive, it’s also easy to overlook some of your financial needs while you’re adjusting to all the changes you’re experiencing. For example: Newly married couples should check their beneficiary information on their accounts to ensure they are up-to-date and that their life insurance coverage is sufficient.
  • Business owner
    • If you own a business, you have a different set of financial tools at your disposal. One quick example is choosing the right retirement plan for your business. While most people have to choose between a Roth and traditional IRA, business owners have more options with different limits and requirements. Also, depending on how your business is set up, you may need a succession plan to exit the business as well.
  • High-income earners and people with a high net worth
    • Those with a high income or high net worth may find a financial planner useful when navigating tax liabilities and investments.
  • Close to or in retirement
    • If you’re getting close to retirement, a financial planner can help determine how prepared you are for it and how long your money may last in retirement. For those who are already retired, a planner may help you avoid running out of money.
  • Complicated health or estate issues
    • Health care can get very expensive in retirement. Health care expenses for retirees rose to an average of $275,000 per couple, excluding long-term care expenses, according to a 2017 estimate from Fidelity. This is an increase of $15,000 from 2016.
    • For those who own multiple properties and businesses, a financial planner may be able to help determine the types of wills, titles or trusts needed to ensure your assets are distributed according to your wishes.

How much does a financial planner cost?

It can be difficult to compare the costs for a financial planner. This is because each planner may base their cost on different metrics (see below). In some cases, they may charge a flat fee based on a percentage of your total assets, also known as assets under management (AUM), or just a flat dollar amount. The important thing here is that your planner is transparent and upfront with their costs. One way to ensure this is by asking if your financial planner is held to the fiduciary standard. This standard requires that the planner act only in your best interest when providing recommendations.

Commission-based: These planners only receive payments through commissions on products they sell. These products could include life insurance, mutual funds or annuities. This can present a major conflict of interest. They’re incentivized to sell products whether or not those products make sense for you.

Fee-based: Fee-based advisers can earn commissions off product sales, but they also offer services for flat fees paid by their clients. While this eliminates some conflicts, fee-based service models still leave the door open for a planner to make a recommendation that isn’t necessarily the best for their clients.

Fee-only: Fee-only financial advisers are not the same as fee-based. Fee-only advisers are paid a set fee by their clients for the services they provide. They do not earn commissions off product sales. For this reason, there are inherently no conflicts of interest between you and your adviser if they’re fee-only. Fee-only planners are only getting paid by you to provide advice.

How to choose a financial planner

Choosing a financial planner goes beyond picking someone based on their credentials alone. Though the CFP is widely regarded as the gold standard, there are many designations that make it difficult to accurately compare one planner to another. You should also take experience and compatibility into account. Your financial planner should have experience with dealing with clients that fit your profile (e.g. income, business ownership, age) and needs.

Some also prefer planners who have had experience investing in down markets. Additionally, you should seek out a planner you trust — one you feel comfortable speaking openly with and one who listens to you.

Questions to ask a financial planner

The following questions are designed to help you not only understand your financial planner’s background but find out what areas they specialize in and if those areas fit with your goals.

  • What kind of designations do you have?
    • Common designations other than CFP are the certified public accountant (CPA), Chartered Life Underwriter (CLU), Chartered Financial Analyst (CFA) and Chartered Financial Consultant (ChFC). If they do not have a designation, you may want to ask if they are working toward them. Many of these designations require three years or more of industry experience and certification tests that are only offered a few times per year.
  • What services do you offer?
    • Not every financial planner will offer the same services, and can vary significantly based on the planner’s comfort level, team and experience. You will want to ask this information early in the conversation to ensure they can help you meet your needs.
  • What is your specialization?
    • Some financial planners choose to specialize in a particular area such as taxes or estate planning. If your situation is more complex, you’ll want to seek out a planner who specializes in your needs.
  • Do you work with any outside specialist? If so, are you compensated for that?
    • Some areas of your financial plan cannot be executed by your planner unless they are an attorney. This includes things like wills and trust agreements. You’ll also want to know if they are being paid by that outside specialist, as this could be a conflict of interest.
  • What kind of clients do you work with?
    • This will give you more information on the planner’s experience level and expertise.
  • Are you a fiduciary?
    • A fiduciary is required to act in the best interest of the client. If the planner answers no, you should ask them to disclose all potential conflicts of interest.
  • How are you compensated?
    • Generally a financial planner’s compensation will fall into three categories: commission based, fee-based, fee-only (discussed in detail above).
  • What happens if I am unable to get in contact with you?
    • Is there a 24-hour hotline you can call to get help? Is there a backup staff? When you have a financial emergency and your planner is not available, you will still need guidance. Your planner should have some system in place.
  • How often do you communicate with clients?
    • Having a planner is not valuable if you do not communicate with them. At a minimum, you should be having an annual sit-down with your financial planner.
  • What is your investment philosophy?
    • The answer to this question will help you assess your fit with the financial planner. Your financial planner’s philosophy will depend on their investment experience and any additional credentials they may have.
  • How are you evaluated?
    • Some financial advisers are evaluated by management solely on the amount of commissions they generate or the amount of money they manage. Others are evaluated by client surveys or a combination of all three. Ask how they are evaluated, and this should give you insight about how you will be treated as a client.

How to find a financial planner

Now that you know what to look for, your next step is to find a financial planner. Each of the following are all groups who feature fee-only financial planners that uphold the fiduciary standard.

XY Planning Network: XYPN is the leading organization of fee-only financial advisers who specialize in serving Gen X and Gen Y clients. All of their members can work virtually, which means you can choose the best adviser for you regardless of physical location.

Garrett Planning Network: GPN is another organization of fee-only planners who serve clients from all walks of life. Their advisers offer planning services on an hourly basis.

National Association of Professional Financial Advisors: NAPFA is the largest organization of professional advisers who meet the highest set standards in the financial planning industry.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Kevin Matthews II
Kevin Matthews II |

Kevin Matthews II is a writer at MagnifyMoney. You can email Kevin here

TAGS: , ,

Advertiser Disclosure

Mortgage, News, Retirement

The Risky Way Retirees Use Reverse Mortgages for Extra Income

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

If you’re approaching retirement, you’re probably already aware that taking Social Security at age 62 results in getting a much smaller benefit than someone who waits until full retirement age. For most retirees today, full retirement age is 66 or 67, but you can earn an even larger pay out if you can wait till age 70 to start tapping in to your benefits.

Living off your existing savings while you wait the extra eight years to start receiving Social Security benefits can be challenging. For that reason, an increasing number of financial experts are encouraging retirees to use a reverse mortgage as a source of additional income while they wait to start drawing on their Social Security benefits.

Using a reverse mortgage for extra income in retirement can be risky — so risky, in fact, that the Consumer Financial Protection Bureau (CFPB) recently spoke out against it.

“A reverse mortgage loan can help some older homeowners meet financial needs, but can also jeopardize their retirement if not used carefully,” CFPB Director Richard Cordray said in a statement. “For consumers whose main asset is their home, taking out a reverse mortgage to delay Social Security claiming may risk their financial security because the cost of the loan will likely be more than the benefit they gain.”

Still, retirees with significant equity built up in their homes might be tempted to tap into that equity to bridge the gap between when they retire and when they can maximize their Social Security benefit.

A quick recap of what a reverse mortgage is and how it works:

A reverse mortgage is a special type of home loan that allows homeowners age 62 and over to withdraw a portion of the equity they have in the home. Instead of paying interest and fees each month that amount is added to your overall loan balance. When you no longer live in the home, the total loan must be paid back and you will pay no more than the value of the house. With a reverse mortgage you are no longer responsible for the regular monthly payments on your mortgage loan but you are required to keep the home in good condition, as well as paying the property taxes and homeowner’s insurance.

Most reverse mortgages are federally insured by the Home Equity Conversion Mortgage (HECM) program, which requires a strict set of rules and regulations that must be met in order to qualify. Some of those requirements include: occupying the property as your principal residence, continuing to live in the home and not being delinquent on any federal debt. The U.S. Department of Housing and Urban Development has a full list of requirements here.

The pros of using a reverse mortgage

Using a reverse mortgage can provide some additional, predictable income during retirement. Whereas relying solely on your investments could result in unstable returns depending on your portfolio. But a reverse mortgage loan isn’t a bottomless source of cash.

The amount of money you can receive from a reverse mortgage first depends on your principal limit. That’s the amount a lender will be willing to loan you based on a several factors, like your age, the value of the home and the interest rate on your loan. This is where older borrowers have an advantage. According to the CFPB, “loans with older borrowers, higher-priced homes, and lower interest rates will have higher principal limits than loans with younger borrowers, lower-priced homes, and higher interest rates.”

Another big advantage of reverse mortgages are that the proceeds are generally tax free and will not affect Medicare payments.

The risks of a reverse mortgage

It reduces the amount of equity you have in the home, which can complicate a future sale. The equity in your home is generally defined as the amount of ownership you have in a property less any remaining debt. With a regular mortgage you borrow money from the bank and pay down the balance over time. With each payment the loan balance goes down and your equity increases.

You’ll lose home equity. Since a reverse mortgage allows you to borrow from the equity you have in the home, your debt on the home increases and the equity is lowered. A reverse mortgage may limit the options for someone looking to sell their home in retirement, because the loan must be paid upon the sale and there may not be enough equity left to purchase a new home.

It increases your overall debt. As seen in the images above, a reverse mortgage reduces the amount that you own in your home and adds that amount back into your loan balance. This increases your overall debt.

The cost of a reverse mortgage can outweigh the benefits of increasing your Social Security payments. Though you are borrowing from the money you’ve paid into your home, a reverse mortgage isn’t free. Just like your regular initial mortgage you will have to pay interest and fees. Reverse mortgages are very similar and usually include costs such as: mortgage insurance premiums (MIP), interest, upfront origination fees, closing costs and monthly servicing fees.

In the figure above, the CFPB estimates a reverse mortgage will cost $21,600 for someone who uses the option from age 62 to age 67; but the lifetime gain in Social Security from 62 to 67 is $29,640.

Monetarily, in this scenario a reverse mortgage makes sense. However most borrowers use a reverse mortgage for seven years not five as in the previous example. This would bring the cost to $31,900, approximately $3,900 which is more than the lifetime benefit of waiting until 67 for Social Security.

You’re putting your home at risk. You could also lose your home if you no longer meet the loan requirements. This includes not living in the home for the majority of the year for non-medical reasons or living outside of the home for 12 consecutive months for healthcare reasons.

You’re putting your heirs at risk.  When you pass away your heirs will have to pay back the loan, usually by selling home. If there is money left over after the sale, they can keep the difference. However, if the loan balance is more than the value of the home and they want to keep the home they will need to pay the full loan balance or 95% of the appraised value, whichever is less according to the CFPB.

When does it make sense to use a reverse mortgage for income in retirement?

In general, Chartered Financial Analyst Joseph Hough says reverse mortgages are best for retirees who are in good health and expect to live long after retirement. Also, it can be one of the few options retirees have when their retirement income is simply not high enough to cover their basic needs.

Speak with a financial advisor who can help you weigh the particular pros and cons with your specific situation. Every person is different, and there is no one size fits all answer.

When does it not make sense?

A reverse mortgage may not be a good fit for those in bad health due to the risk of losing the home. If you’re planning on selling your home, having a reverse mortgage can complicate the issue because it reduces the amount of equity you have. You could be left in a scenario where the proceeds of the sale do not cover a purchase of a new home because of the cost and fees associated with reverse mortgages.

What are some other ways I can maximize my SS benefit?

Working beyond 62 may be the best option to maximize your Social Security benefit. Doing so allows more time to save for retirement and pay off any debt. You could potentially increase your overall Social Security benefits if your latest year of earnings is one of your highest. Also, if you’re married, consider coordinating your Social Security decisions with your spouse. Other alternatives to a reverse mortgage include selling your home and downsizing to a less expensive place or selling your home to your adult children on the condition you get to live rent-free, says Houge.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Kevin Matthews II
Kevin Matthews II |

Kevin Matthews II is a writer at MagnifyMoney. You can email Kevin here

TAGS:

Compare Mortgage Loan Offers for Free

Home Purchase Quotes

Home Refinance Quotes

(It only takes 3 minutes!)

NMLS #1136 Terms & Conditions Apply