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When you’re married and are each other’s beneficiaries, it makes sense to create a single joint will, right? Not necessarily. Even if you plan to leave everything to your significant other upon death, creating this kind of legal document may lead to complications down the line.

Let’s take a closer look at the different kinds of wills married couples can create so you can decide what’s best for you. Here’s what you need to know so you can have the right legal paperwork in place.

What Is a Joint Will?

A joint will is a single shared legal document, signed by two or more people. It is relatively uncommon today, and many attorneys recommend against them. One of the motivations for a joint will is that, when one person dies, it’s nearly impossible for a surviving spouse to change the terms of the will. This can be problematic because circumstances change over time. What if the person mentioned to inherit property in the will has passed away?

That said, a joint will for a couple can seem desirable precisely because it’s not flexible. This can ensure that a child from a previous marriage, for example, inherits what is outlined in the will even if their parent dies before their new spouse does. But these sort of permanent clauses can be handled in a trust, which can allow for complex, shifting situations.


💡 Quick Tip: A trust is a customized estate planning tool that can be helpful for your heirs in addition to a will.

How Do Joint Wills Work?

A joint will for a married couple is a single document, signed by two partners. When you’re both alive, changes can be made as long as you both agree. But once a partner dies, the will becomes binding.

For this reason, a joint will for a married couple can be binding, restrictive, and not necessarily optimal for the complexity of modern-day life.

Say that the will stipulates that the house the couple owns will be inherited by their three children upon the death of both spouses. But what if the surviving spouse has a financial emergency and wants to sell the house? Or simply wants to downsize to a smaller living space? Because of the will, they could be stuck in a difficult scenario.

Also consider that a joint will doesn’t always cover the ‘what ifs’ that can come up during life. From remarriage to family disputes to having more children, a joint will can lock assets in time, making it tough for the surviving spouse to move on.

How Do Mutual Wills Work?

Fortunately, there are options for those who worry about a joint will being too rigid. A more common option that offers flexibility is what’s known as a mutual will, or mirror will. In this case, two documents are created, one for each spouse. They may be identical, but because they are two documents, separately signed, the surviving spouse can then modify their own individual will when their partner passes away.

But what if you are concerned that you might die first and your surviving spouse could, say, omit a child or other loved one from their inheritance? (Yes, that may sound odd, but life contains many complicated family situations!) In this case, lawyers may recommend a trust as an option to ensure that your own personal wishes are carried out when it comes to your property. The trust can also make sure that your directives are followed when it comes to joint property mutually owned, like real estate.

Recommended: Important Estate Planning Documents to Know

Joint Will vs Individual Will: Pros and Cons

So, what are the pros and cons of joint wills versus individual (separate) wills? In general, the biggest con against a joint will may be the lack of flexibility. But for some people with relatively simple estates, this can seem like a positive.

Pros of a joint will:

•   Simplicity. It’s a one-and-done proposition!

•   Clarity. It ensures that both partner’s wishes, as written, will be respected, even after death.

Cons of a joint will:

•   Rigidity. If a partner gets remarried or has more children, it will be complicated if not impossible to change the original will.

Pros of an individual will:

•   Flexibility. After a partner dies, the surviving partner can change the will to reflect their new reality.

•   Simplicity. You can create one document and each sign it separately. Each individual is then free to amend their own will.

Cons of an individual will:

•   Flexibility. Yes, this is a double-edged sword. These wills aren’t “carved in stone” which can be a good or bad thing. Here’s the latter: With individual wills, the wishes of the partner who dies first may not be fully honored. These concerns may be solved by the creation of a trust.

•   Maintenance-intensive. A surviving partner may want to rewrite their will over time as their life circumstances change.

Do Husbands and Wives Need Individual Wills?

In most cases, yes, it’s beneficial if husbands and wives have separate wills. The wills can be identical — also called a mutual will or mirror will — but having two distinct documents that are individually signed can help protect against what-ifs in the future. Having individual wills can give flexibility to the surviving spouse.

Let’s say that a joint will stipulates that a house owned jointly by a married couple will go to children upon the death of both spouses. That means if one spouse dies, the other spouse may not be able to sell the house that he or she lives in, even in the case of financial hardship. A joint will can lock a surviving spouse in time, despite evolving circumstances.

Instead, a couple may prefer individual wills. These can mirror each other, but the surviving spouse retains flexibility in case their needs or circumstances change after the spouse dies.

Worth noting: For some, the lack of flexibility of a joint will may be seen as positive. For example, some couples may want a joint will to ensure their children receive an inheritance, even if the surviving spouse remarries. However, some legal experts believe this goal can better be achieved through the creation of a trust.

As you think about making your will, it can be helpful to consider the pros and cons of a joint will. Getting an expert opinion can also be a smart move.

What Happens to a Joint Will When Someone Dies?

A joint will is essentially frozen in time when someone dies. The will becomes “irrevocable,” and property must be divided according to the terms of the will. If it says all assets are to be inherited by the surviving spouse, then the surviving spouse will inherit assets. But confusion may occur if and when both spouses pass away. A joint will then makes it hard, if not impossible, to reallocate property.

Let’s consider another scenario to see why a joint will can be problematic. Perhaps a joint will specifies that a certain sum of money is to go to a charity upon death. If the charity no longer exists after one spouse passes away, this may lead to complications and a legal headache.

In short: A joint will is similar to a time capsule. While its contents may make sense now, it can be helpful to consider “what ifs” that may happen ten, twenty, or fifty years in the future. This can lead some couples to decide that individual wills will work better.

Recommended: What Happens If You Die Without A Will?

Can You Make a Joint Will Online?

It is possible to make a joint will online. But because not every state recognizes a joint will, it’s important to make sure you live in a state that does before you move forward.


💡 Quick Tip: It’s recommended that you update your will every 3-5 years, and after any major life event. With online estate planning, changes can be made in just a few minutes — no attorney required.

The Takeaway

End-of-life planning is an important way to express your wishes and protect those closest to you. A will is one key component of that, but married couples have an important choice to make when deciding whether to have joint or individual wills. Even if you and your spouse are the ultimate joined-at-the-hip lovebirds, having separate wills may be a good idea. It can often provide more flexibility and family peace in the years ahead.

When you want to make things easier on your loved ones in the future, SoFi can help. We partnered with Trust & Will, the leading online estate planning platform, to give our members 15% off their trust, will, or guardianship. The forms are fast, secure, and easy to use.

Photo credit: iStock/fizkes

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Employer-sponsored retirement plans like a 401(k) are a common way for workers to save for retirement. According to the Bureau of Labor Statistics, a little more than half of private industry employees participate in a retirement plan at work. So participants need to understand how 401(k) taxes work to take advantage of this popular retirement savings tool.

With a traditional 401(k) plan, employees can contribute a portion of their salary to an account with various investment options, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), and cash.

There are two main types of workplace 401(k) plans: a traditional 401(k) plan and a Roth 401(k). The 401(k) tax rules depend on which plan an employee participates in.

Traditional 401(k) Tax Rules

When it comes to this employer-sponsored retirement savings plan, here are key things to know about 401(k) taxes and 401(k) withdrawal tax.

Recommended: Understanding the Different Types of Retirement Plans

401(k) Contributions are Made With Pre-tax Income

One of the biggest advantages of a 401(k) is its tax break on contributions. When you contribute to a 401(k), the money is deducted from your paycheck before taxes are taken out, which reduces your taxable income for the year. This means that you’ll pay less in income tax, which can save you a significant amount of money over time.

If you’re contributing to your company’s 401(k), each time you receive a paycheck, a self-determined portion of it is deposited into your 401(k) account before taxes are taken out, and the rest is taxed and paid to you.

For 2024, participants can contribute up to $23,000 to a 401(k) plan, plus $7,500 in catch-up contributions if they’re 50 or older. These contribution limits are up from 2023, when the limit was $22,500, plus the additional $7,500 for those aged 50 and up.

401(k) Contributions Lower Your Taxable Income

The more you contribute to your 401(k) account, the lower your taxable income is in that year. If you contribute 15% of your income to your 401(k), for instance, you’ll only owe taxes on 85% of your income.

Withdrawals From a 401(k) Account Are Taxable

When you take withdrawals from your 401(k) account in retirement, you’ll be taxed on your contributions and any earnings accrued over time.

The withdrawals count as taxable income, so during the years you withdraw funds from your 401(k) account, you will owe taxes in your retirement income tax bracket.

Early 401(k) Withdrawals Come With Taxes and Penalties

If you withdraw money from your 401(k) before age 59 ½, you’ll owe both income taxes and a 10% tax penalty on the distribution.

Although individual retirement accounts (IRAs) allow penalty-free early withdrawals for qualified first-time homebuyers and qualified higher education expenses, that is not true for 401(k) plans.

That said, if an employee leaves a company during or after the year they turn 55, they can start taking distributions from their 401(k) account without paying taxes or early withdrawal penalties.

Can you take out a loan or hardship withdrawal from your plan assets? Many plans do allow that up to a certain amount, but withdrawing money from a retirement account means you lose out on the compound growth from funds withdrawn. You will also have to pay interest (yes, to yourself) on the loan.

Roth 401(k) Tax Rules

Here are some tax rules for the Roth 401(k).

Your Roth 401(k) Contributions Are Made With After-Tax Income

When it comes to taxes, a Roth 401(k) works the opposite way of a traditional 401(k). Your contributions are post-tax, meaning you pay taxes on the money in the year you contribute.

If you have a Roth 401(k) and your company offers a 401(k) match, that matching contribution will go into a pre-tax account, which would be a traditional 401(k) account. So you would essentially have a Roth 401(k) made up of your own contributions and a traditional 401(k) of your employer’s contributions.

Recommended: How an Employer 401(k) Match Works

Roth 401(k) Contributions Do Not Lower Your Taxable Income

When you have Roth 401(k) contributions automatically deducted from your paycheck, your full paycheck amount will be taxed, and then money will be transferred to your Roth 401(k).

For instance, if you’re making $50,000 and contributing 10% to a Roth 401(k), $5,000 will be deposited into your Roth 401(k) annually, but you’ll still be taxed on the full $50,000.

Roth 401(k) Withdrawals Are Tax-Free

When you take money from your Roth 401(k) in retirement, the distributions are tax-free, including your contributions and any earnings that have accrued (as long as you’ve had the account for at least five years).

No matter what your tax bracket is in retirement, qualified withdrawals from your Roth 401(k) are not counted as taxable income.

There Are Limits on Roth 401(k) Withdrawals

In order for a withdrawal from a Roth 401(k) to count as a qualified distribution — meaning, it won’t be taxed — an employee must be age 59 ½ or older and have held the account for at least five years.

If you make a withdrawal before this point — even if you’re age 61 but have only held the account since age 58 — the withdrawal would be considered an early, or unqualified, withdrawal. If this happens, you would owe taxes on any earnings you withdraw and could pay a 10% penalty.

Early withdrawals are prorated according to the ratio of contributions to earnings in the account. For instance, if your Roth 401(k) had $100,000 in it, made up of $70,000 in contributions and $30,000 in earnings, your early withdrawals would be made up of 70% contributions and 30% earnings. Hence, you would owe taxes and potentially penalties on 30% of your early withdrawal.

If the plan allows it, you can take a loan from your Roth 401(k), just like a traditional 401(k), and the same rules and limits apply to how much you can borrow. Any Roth 401(k) loan amount will be combined with outstanding loans from that plan or any other plan your employer maintains to determine your loan limits.

You Can Roll Roth 401(k) Money Into a Roth IRA

Money in a Roth 401(k) account can be rolled into a Roth IRA. Like an employer-sponsored Roth 401(k), a Roth IRA is funded with after-tax dollars.

One of the significant differences between a Roth 401(k) and a Roth IRA is that the 401(k) requires participants to start taking required minimum distributions at age 72, but there is no such requirement for a Roth IRA.

It’s important to note, however, that there’s also a five-year rule for Roth IRAs: Earnings cannot be withdrawn tax- and penalty-free from a Roth IRA until five years after the account’s first contribution. If you roll a Roth 401(k) into a new Roth IRA, the five-year clock starts over at that time.

Do You Have to Pay Taxes on a 401(k) Rollover?

If you do a direct rollover of your 401(k) into an IRA or another eligible retirement account, you generally won’t have to pay taxes on the rollover. However, if you receive the funds from your 401(k) and then roll them over yourself within 60 days, you may have to pay taxes on the amount rolled over, as the IRS will treat it as a distribution from the 401(k).

Recommended: How to Roll Over Your 401(k)

Do You Have to Pay 401(k) Taxes after 59 ½?

If you have a traditional 401(k), you will generally have to pay taxes on withdrawals after age 59 ½. This is because the money you contributed to the 401(k) was not taxed when you earned it, so it’s considered income when you withdraw it in retirement.

However, if you have a Roth 401(k), you can withdraw your contributions and earnings tax-free in retirement as long as you meet certain requirements, such as being at least 59 ½ and having had the account for at least five years.

Do You Pay 401(k) Taxes on Employer Contributions?

The taxation of employer contributions to a 401(k) depends on whether the account is a traditional or Roth 401(k).

In the case of traditional 401(k) contributions, the employer contributions are not included in your taxable income for the year they are made, but you will pay taxes on them when you withdraw the funds from the 401(k) in retirement.

In the case of Roth contributions, the employer contributions are not included in a post-tax Roth 401(k) but rather in a pre-tax traditional 401(k) account. So, you do not pay taxes on the employer contributions in a Roth 401(k), but you do pay taxes on withdrawals.

How Can I Avoid 401(k) Taxes on My Withdrawal?

The only way to avoid taxes on 401(k) withdrawals is to take advantage of a Roth 401(k), as noted above. With a Roth 401(k), your contributions are made post-tax, but withdrawals are tax-free if you meet certain criteria to avoid the penalties mentioned above.

However, even if you have to pay taxes on your 401(k) withdrawals, you can take the following steps to minimize your taxes.

Consider Your Tax Bracket

Contributing to a traditional 401(k) is essentially a bet that you’ll be in a lower tax bracket in retirement — you’re choosing to forgo taxes now and pay taxes later.

Contributing to a Roth 401(k) takes the opposite approach: Pay taxes now, so you don’t have to pay taxes later. The best approach for you will depend on your income, your tax situation, and your future tax treatment expectations.

Strategize Your Account Mix

Having savings in different accounts — both pre-tax and post-tax — may offer more flexibility in retirement.

For instance, if you need to make a large purchase, such as a vacation home or a car, it may be helpful to be able to pull the income from a source that doesn’t trigger a taxable event. This might mean a retirement strategy that includes a traditional 401(k), a Roth IRA, and a taxable brokerage account.

Decide Where To Live

Eight U.S. states don’t charge individual income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. And New Hampshire only taxes interest and dividend income.

This can affect your tax planning if you live in a tax-free state now or intend to live in a tax-free state in retirement.

The Takeaway

Saving for retirement is one of the best ways to prepare for a secure future. And understanding the tax rules for 401(k) withdrawals and contributions is essential for effective retirement planning. By educating yourself on the rules and regulations surrounding 401(k) taxes, you can optimize your retirement savings and minimize your tax burden.

Another strategy to help stay on top of your retirement savings is to roll over a previous 401(k) to a rollover IRA. Then you can manage your money in one place.

SoFi makes the rollover process seamless. The process is automated so there’s no need to watch the mail for your 401(k) check — and there are no rollover fees or taxes.

FAQ

Do you get taxed on your 401(k)?

You either pay taxes on your 401(k) contributions — in the case of a Roth 401(k) — or on your traditional 401(k) withdrawals in retirement.

When can you withdraw from 401(k) tax free?

You can withdraw from a Roth 401(k) tax-free if you have had the account for at least five years and are over age 59 ½. With a traditional 401(k), withdrawals are generally subject to income tax.

How can I avoid paying taxes on my 401(k)?

You never truly avoid paying taxes on a 401(k), as you either have to pay taxes on contributions or withdrawals, depending on the type of 401(k) account. By contributing to a Roth 401(k) instead of a traditional 401(k), you can withdraw your contributions and earnings tax-free in retirement.

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