An add-on certificate of deposit (CD) allows you to make additional deposits throughout the CD's term, not just at the initial purchase. It offers more flexibility than a standard CD but comes with some restrictions.

What Is an Add-On CD?

An add-on CD is a specific type of certificate of deposit offered by banks and credit unions that allows you to add more money to your account anytime after your initial deposit.

For instance, suppose you buy an add-on CD with a 2-year term and an APY of 3 percent. You make an initial deposit of $2,500 and start to deposit an additional amount of $500 every month until the CD's maturity date.

Depending on the CD's compounding frequency, you would have saved $14,500 and might earn $500 in interest at the end of the two years.

Investing in an add-on CD allows you to deposit more money in the CD account and earn more interest than a conventional CD.

How Do Add-On CDs Work?

When you open a CD account, you typically agree to deposit a set amount of money for a specific period, known as the maturity period, which can range from 30 days to 10 years. In return, the bank or credit union pays you interest on your deposit.

You can't add more money after your initial deposit with traditional CDs. However, an add-on CD allows you to continue making deposits until it reaches maturity.

How you add money to an add-on CD depends on the bank or credit union holding the account. For instance, you can schedule automatic transfers from a checking or savings account bi-weekly or monthly.

The bank or credit union may also limit the amount or the number of additional deposits you can make to your CD account.

Add-On CD vs. Traditional CD

While add-ons and traditional CDs involve depositing money for a specific period, how you fund them makes them different. Conventional CDs only allow a single deposit during the account opening. In contrast, add-on CDs let you continue depositing money throughout the CD's term.

Add-on CDs also differ from traditional CDs in the following ways:

• Shorter Terms: Add-on CDs are less common than conventional CDs and usually have shorter terms.
• Interest Rate: The interest rate on add-on CDs is generally lower than that on traditional CDs.
• Minimum Deposit Requirements: Add-on CDs typically have lower minimum deposit requirements than traditional CDs.

Benefits

Add-on CDs can be an excellent option for investors who want security and flexibility with their investments. Some benefits offered include:

• Fixed Interest Rate: Add-on CDs usually come with a fixed interest rate that provides an expected predetermined yield for the term. Variable rate options may also exist for some CD offerings.
• Low Initial Deposit Requirement: Banks and credit unions require lower initial deposits for add-on CDs than for traditional CDs.
• Offers Flexibility With Deposits: With add-on CDs, you can continue depositing money as a long-term investment strategy.

Considerations and Limitations

Certificates of deposit (CDs) are safe short-term investment options that offer guaranteed interest at maturity. While the Federal Deposit Insurance Corporation (FDIC) insures CDs from banks, the National Credit Union Administration (NCUA) insures CDs from credit unions. The FDIC and NCUA cover up to $250,000 per depositor per institution.

When deciding between a traditional or add-on CD, consider the amount of cash you want to invest and the flexibility you need. Investing in an add-on CD is an excellent choice if you:

• Want a stable, high-quality investment that offers guaranteed interest.
• Are comfortable locking up cash for a set period.

An add-on CD may be a good option if you start with a relatively small investment and add more deposits as your finances allow.

However, add-on CDs come with some limitations:

• Lower Interest Rates: Add-on CDs generally offer lower interest rates than traditional CDs.
• Early Withdrawal Penalty: If you withdraw funds before maturity, you may be penalized unless your CD terms specify otherwise. Penalties can vary widely between financial institutions, and some FIs may allow penalty-free withdrawals during specific periods (e.g., grace periods or no-penalty CDs).
• Limited Availability: Fewer banks and credit unions offer add-on CDs than traditional CDs.
• Guaranteed Return: Add-on CDs often start with a fixed interest rate so that you won't benefit from interest rate increases available with variable-rate CDs.

Takeaway

An add-on CD can be an excellent way to store and grow your funds. It benefits those who want a stable, high-quality, short-term investment tool that starts with guaranteed interest and allows cash additions to build up their funds.