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From a tax perspective, what are the pros and cons of opening a joint investment account?

To be more specific, I have a portfolio made up of Vanguard index funds. My girlfriend would like to start contributing to the account. Vanguard would consider us Tenants In Common. I have a higher salary. We're wondering if it would be more tax efficient to keep the account in my name or make it a joint account.

  • hawkharris - First, welcome. Second, this site is very concerned with jurisdiction, and we have very consistently asked for it since the inception of the site. We tag most question with location as we want to support an international community. That being said, our community should be more courteous in directing our new users about the location requirement. @littleadv – MrChrister Oct 2 '14 at 1:44
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If you keep the account in your name only and your girlfriend is depositing money into it, then she is in effect making gifts of money to you. If the total amount of such gifts exceeds $14K in 2014, she will need to file a gift tax return (IRS Form 709, due April 15 of the following year, but not included with her Federal tax return; it has to be sent to a specific IRS office as detailed in the Instructions for Form 709). She would need to pay gift tax (as computed on Form 709) unless she opts to have the excess over $14K count towards her Federal lifetime combined gift and estate tax exclusion of $5M+ and so no gift tax is due. Most estates in the US are far smaller than $5 million and pay no Federal estate tax at all and for most people, the reduction of the lifetime combined... is of no consequence. Another point (for your girlfriend to think about): if you two should break up and go your separate ways at a later time, you are under no obligation to return her money to her, and if you do choose to do so, you will need to file a gift tax return at that time. If you will be returning her contributions together with all the earnings attributable to her contributions, then keep in mind that you will have paid income taxes on those earnings all along since the account is in your name only. Finally, keep in mind that the I in IRA stands for Individual and your girlfriend is not entitled to put her contributions into your IRA account.

Summary: don't do this (or open a joint account as tenants in common) no matter how much you love each other. She should open accounts in her name only and make contributions to those accounts.

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I am not a lawyer, but the big thing to consider would be how you would split the money should either of you decide you want to close the account (or, at least her/his portion of the account). I suspect you'd also need to determine how to split the capital gains/losses for tax purposes. I can't really see any benefit to a joint account, unless you needed her money to qualify for some of the lower cost funds, and even then the difference in cost would be fairly low, much lower than the cost of having to potentially hire a lawyer to sort out all the questions.

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