401(k) Tips

Can a 401(k) Be Jointly Owned?

401(k) are reserved for individuals only. Spouses can’t own a 401(k) jointly, however, both spouses can benefit from the tax breaks.

3 min read

Maxing out your 401(k) is the most you can do to ensure you’re setting yourself up for a solid retirement. You can control how much you contribute to your 401(k), but you can’t control how the market performs or even if your employer provides matching contributions. That being said, many married couples seek ways to increase their retirement savings by looking for joint accounts. But can a 401(k) be jointly owned?

Unfortunately, 401(k)s cannot be held jointly between spouses. 401(k)s are employer-sponsored individual retirement accounts, and individual is key. However, spouses can be named as beneficiaries to a 401(k), which grants a surviving spouse the retirement funds should the account holder die.

Although spouses can’t hold 401(k)s together, they can still have individual 401(k)s and maximize the tax breaks 401(k)s provide jointly.

401(k)s cannot be a joint account.

When two people get married, it’s important to combine finances. This way, both spouses can be on the same page on the household finances. While spouses can open joint bank accounts, take out loans together, and be on insurance policies together, 401(k)s and other retirement accounts can only be held by an individual.

Employer-sponsored 401(k)s are tied to the individual employee who works there and their employment status with that company. Many companies require employees to be employed for a specific time period before they are eligible for the company’s benefits package, including its 401(k).

Additionally, if the employer provides any matching contributions, many times, employees need to be employed continuously over time in order for the matching contributions to be fully vested.

Spouses can be names as beneficiaries to a 401(k).

While not the same as having a joint retirement account, spouses can be named as beneficiaries to a 401(k). However, the beneficiary has no access to the 401(k) to withdraw or contribute funds while the account holder is still alive.

Once the account holder passes away, the 401(k) will be distributed to its beneficiaries in percentages according to the will. A beneficiary distribution because of death is not considered a taxable event by the IRS so long as the funds are rolled over into another eligible retirement account.

To name someone other than a spouse as beneficiary to a 401(k), the spouse needs to sign off as approval.

401(k)s can only be transferred in certain circumstances.

When it comes to retirement accounts, the IRS notoriously encourages account holders to keep the funds where they are until retirement. The IRS imposes penalty taxes for early retirement distributions that don’t meet specific criteria.

However, there are a couple of scenarios the IRS allows retirement funds to be transferred out of a 401(k) and to a spouse.

First, as mentioned, is due to the death of the account holder. If a beneficiary is not named, the 401(k) will automatically be distributed to the surviving spouse. If the account holder dies without a spouse and no beneficiary, the 401(k) funds will become part of the estate. The 401(k) will then enter probate and be distributed in accordance with your will.

The second way a 401(k) can be transferred to a spouse is through a divorce. Unless otherwise negotiated through mediation, a separated spouse can obtain access to the other spouse’s 401(k) account regardless if they are named as beneficiary or not. The receiving spouse can deposit the awarded 401(k) funds into their own IRA and avoid any income taxes. However, if they choose to keep the funds as cash, they will need to pay income taxes for that tax year.

Spouses can jointly maximize on the tax benefits of 401(k)s.

Despite not being to jointly hold a 401(k) or contribute to one, both spouses can take advantage of the tax benefits on their joint tax returns.

The IRS allows each 401(k) participant to contribute a maximum of $19,500, $26,000 for those over 50.

Married couples who file their taxes joinlty can defer taxes on both spouse’s 401(k) contributions. This means if both spouses maximize their 401(k) contributions, they can defer between $39,000 or $52,000 in taxes, depending on their age. This helps lower the tax burden, especially if one spouse significantly outearns the other by potentially dropping the couple into a lower tax bracket.

Bottom line.

Although married couples can’t hold joint 401(k)s, there are many ways couples can benefit jointly from their individual retirement accounts.

Naming each other as beneficiaries will help transfer 401(k) funds to a spouse after death.

Additionally, maxing out your 401(k) contributions can significantly reduce the tax burden of both spouses who files taxes jointly.

Regardless, if you’re looking to get the most out of your 401(k) savings, it’s essential to make sure you’re properly managing your retirement accounts. Rolling over old 401(k)s into your current retirement account, reviewing your 401(k) statements and balances periodically, and reallocating your retirement funds are vital in making sure your 401(k) is growing.