What Is An Add-On CD?

Add-on Certificates of Deposit (CDs) are special CDs that allow you to earn interest with minimal risk. The main benefit of these CDs is that you can add more money to them after you open the account. This benefit makes add-on CDs more flexible than standard CDs, but add-on CDs also have some limitations and things to be aware of.

In this article, we’ll explain when an add-on CD would be the right choice and when it might be better to choose a standard CD (or savings account) instead.

What is an Add-on CD?

An add-on CD is a special type of CD offered by some banks and credit unions that allows you to put more money into your account after your initial deposit.

With a traditional CD, funds are deposited at the beginning of the term and interest accrues over a set period of time, while an add-on CD allows for multiple deposits throughout the term.

Like a traditional CD, you’ll have a specific annual percentage rate (APY) locked in for the life of the supplemental CD, and this rate won’t change even if you put more money into the account.

How the Add-on CD works

The process for opening an add-on CD is similar to that for opening a traditional CD: funds are deposited into the account for a set period of time at a fixed APY.

However, after you make your initial deposit into an add-on CD, you can increase the amount in your account by adding funds over time.

For example, say you open an add-on CD with a two-year term and 3 percent annual interest. You put $2,500 down initially and plan to put $500 away each month until the CD matures. At the end of the two-year term, you’ll have $14,500 saved up and earn about $500 in interest.

Being able to add money over time means you can potentially earn much more interest than if you only made an initial deposit.

Can I add money to my CD before it matures?

Add-on CDs allow you to add funds to your account before maturity, which isn’t possible with traditional CDs. The ability to add funds later is a big advantage for savers who can only put aside small amounts at a time.

“Not everyone has a lump sum of money to put into a CD,” says Molly Ford Coates, founder of Ford Financial Management, based in Warner Robins, Ga. “The add-on option allows you to add more money when you have the spare cash.”

Financial institutions may limit the total amount of cash you can deposit or may only allow deposits from certain accounts. Any additional deposits will grow at the same fixed interest rate as your original CD deposit.

Use Bankrate’s CD calculator to see how much you could earn by investing in CDs.

Add-on CD Pros and Cons

Like all financial products, add-on CDs have pros and cons.

CD ladders are highly flexible

CDs, by design, are inflexible. Once you put your money in a CD, you can’t get it back or add it to it until the CD matures, unless you pay an early withdrawal penalty fee. A supplemental CD alleviates some of this flexibility and allows for additional deposits, but it’s not much help if you need to make an unexpected withdrawal.

CD laddering is a strategy you can use with either traditional or supplemental CDs that gives you more opportunities to access your cash without paying early withdrawal penalties. Instead of opening one CD, with a CD ladder you split your funds among several CDs and stagger the maturity dates, giving you more frequent opportunities to make withdrawals.

For example, instead of opening a $4,000 CD with a one-year term, you could open four separate $1,000 CDs with three-month, six-month, nine-month and 12-month terms.

Currently, you have the option to withdraw some of your funds from the CD ladder every three months, and if you want to keep the funds in the account, you can renew it as a one-year CD.

This balances the flexibility and high yields that CDs offer: you get the high interest rate of a CD, but also have the option to withdraw some money from the account periodically.

Where to open the add-on CD

Not all financial institutions that offer traditional CDs offer add-on CDs. Financial institutions that do offer add-on CDs include Bank5 Connect, Fairwinds, and Boeing Employees’ Credit Union.

Before opening additional CDs, be sure to compare CD interest rates from multiple financial institutions and consider overall market rates.

When does an add-on CD make sense?

Add-on CDs are a good option for savers who don’t have the full amount of funds they ultimately want to deposit up front: They can deposit the amount available at the start and add it to the CD’s total amount by the maturity date.

Savers can also consider overall market interest rates to determine if it’s a good time to invest in additional CDs.

“Generally speaking,[CDs]are the type of investment that people are most interested in when interest rates are high,” says Mike Schenck, chief economist at the Credit Union National Association. That’s because locking in a long-term CD when market rates are low means you risk missing out if rates start to trend upward again.

In addition to comparing interest rates, be sure to check the CD’s terms and disclosures to see if there are any specific requirements or penalties. If you expect you’ll need the funds before the maturity date, consider other savings options that give you easier access to your funds, such as a high-yield savings account.

Conclusion

Once you’ve saved up some money, a top-up CD can be a practical option for storing and growing your funds. Not only can it help you grow your initial savings, but it can also help you grow your savings along the way. After maturity, many accounts allow account holders to renew the term, or you can use your excess savings for other investments.

Keep in mind that the funds in a CD are not available during the term of the CD, so it’s a good idea to have a separate emergency fund to avoid having to withdraw funds from your CD early.

–Freelance writer TJ Porter Contributed to updating this article.