An add-on certificate of deposit can bolster your savings with minimal risk. These specialized financial products are more flexible than standard CDs, though they still have some restrictions.

What is an add-on CD?

An add-on CD is a type of certificate of deposit offered by banks and credit unions that allows for money to be added to the account balance after the initial deposit.

With a traditional CD, money is deposited at the beginning of the term and left to generate interest for a defined period. Add-on CDs, on the other hand, permit multiple deposits throughout the term.

Just like a traditional CD, a specific interest rate is locked in for the entire term course of the add-on CD. The interest rate remains the same even when money is added.

How add-on CDs work

The process for opening an add-on CD is similar to opening a traditional CD: Money is deposited into the account for a set period and with a fixed interest rate.

But after you make an initial deposit into an add-on CD, you have the option to increase the amount in the account over time by adding money to it.

Can you add money to a CD before it matures?

An add-on CD permits funds to be added to the account before it matures, a feature unavailable with traditional CDs. The ability to add money later on could be a boon for savers who are able to only put small amounts away at a time.

“Not everyone has the lump [sum] available to invest in a CD,” says Molly Ford-Coates, founder of Ford Financial Management based in Warner Robins, Georgia. “The add-on option allows you to add more money as it becomes available to you.”

The financial institution may restrict the total amount of cash that can be deposited or only allow deposits from certain accounts.

The added deposits will grow at the same fixed interest rate as the original CD deposit. With the Federal Reserve’s interest rate hike and expectations that it will continue to raise rates, having a fixed interest rate on savings could be a disadvantage. The downside of the fixed rate is that savers are stuck at the initial rate when interest rates rise, Ford-Coates says.

Check out Bankrate’s CD calculator to see how much could be gained by investing in a CD.

Pros and cons of add-on CDs

Like all financial products, there are pros and cons that come with an add-on CD.

Pros

  • Fixed interest rate: If market rates for CDs were to drop, you’re guaranteed to earn interest at the predetermined rate for the term.
  • Low initial deposit requirement: Some banks may have lower minimum deposit requirements for their add-on CD products than for opening traditional CDs. For example, First Horizon Bank requires $1,000 to open a traditional CD but only half that amount to open an add-on CD.
  • Money can be added after account opening: If you don’t have a large deposit to make upfront, you can continuously deposit money as part of a long-term savings strategy.

Cons

  • No rate increases: As with most CDs, the money in the account has a fixed rate for a specified period. If CD rates increase during the term, you could be stuck with a lower rate.
  • Traditional CDs might offer a higher rate: Choosing an add-on CD over a traditional CD may mean going with the option that has a lower yield.
  • Early withdrawal penalties apply: Unless there are early withdrawal allowances specified in the CD’s terms, you will usually pay an early withdrawal penalty for taking money from the CD before its maturity.
  • Not easy to find: Though traditional CDs are widely offered by many banks and credit unions, only a small selection offer add-on CDs.

Where to open an add-on CD

Not all financial institutions that offer traditional CDs offer add-on CDs. Some institutions that offer add-on CDs are First Horizon Bank, Bank5 Connect and Boeing Employees’ Credit Union.

Before opening an add-on CD, compare CD rates among several financial institutions and consider overall market rates.

When does an add-on CD make sense?

Add-on CDs are a good option for savers when they might not have all of the funds they want to deposit available upfront. They can deposit what money is available initially and add to the CD’s sum up until the maturity date.

Savers may also want to consider market rates overall to see if it’s a good time to invest in an add-on CD.

“Generally speaking, [CDs are] the sort of investment that you’d be most interested in when rates are high,” says Mike Schenk, chief economist of the Credit Union National Association. That’s because if you lock in a long-term CD when market rates are low, you could miss out on return when rates start trending back upward.

In addition to comparing rates, review the CD’s terms and disclosures to see if there are specific requirements or penalties. If you anticipate needing the funds before the maturity date, consider other savings options that allow for more access to your money, such as a high-yield savings account.

Bottom line

Once you have some savings tucked away, an add-on CD can be a practical option for storing and building up funds. Not only will your initial savings grow, but you can add to your savings along the way. After maturity, many accounts allow the account holder to renew the term, or you could use the extra savings for other investments. Keep in mind that the funds in the CD will not be available for the duration of the CDs term. It’s a good idea to have a separate emergency fund to avoid the need to take funds out of your CD early.