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What is an add-on CD?

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An add-on certificate of deposit, or add-on CD, can be a great way to bolster your savings over time without taking on risk. These specialized CDs can also give you more flexibility than traditional CDs.

To find out whether an add-on CD is right for you, here’s everything you need to consider.

What is an add-on CD?

An add-on CD is a type of certificate of deposit offered by banks and credit unions to store your savings.

Generally, traditional CDs won’t let you add any more cash to the account after your initial deposit. At the end of the term, you will receive your initial deposit plus any interest accrued. Add-on CDs, meanwhile, let you make multiple deposits during the certificate’s term. The number of deposits you are allowed to make will vary based on the CD. But you will have the ability to add to your initial balance in some capacity.

Just like a traditional CD, you will be able to lock in a specific interest rate for the entire course of the add-on CD’s term. You will be able to keep this interest rate even if you add additional funds to the account.

How add-on CDs work

When you open an add-on CD, the initial process will be very similar to opening a traditional CD: You will deposit a sum of money into the CD with the promise of a fixed interest rate for a set period of time.

However, after you make an initial deposit into an add-on CD, you will have more options than if you had put your money into a traditional CD.

Can you add money to a CD before it matures?

You cannot add money to a traditional CD before it matures, but you can add money to an add-on CD before it matures. This feature could be a boon for savers who only have a few hundred dollars to spare.

“Not everyone has the lump [sum] available to invest in a CD,” says Molly Ford-Coates, an accredited financial counselor based in Georgia. “The add-on option allows you to add more money as it becomes available to you.”

However, it’s important to note that there may be some restrictions on how you can add the additional funds. The financial institution may restrict the total amount of cash you can add as well as the deposit frequency. You may also only be able to make deposits from certain accounts.

Deposits will be able to grow at the same fixed rate as your original deposit, which is good news if interest rates drop. However, the downside is that you would also be stuck at your initial rate if interest rates rise, according to Ford-Coates.

Pros and cons of add-on CDs

Like all financial products, there are pros and cons that come with an add-on CD. Here are some important points you need to consider about add-on CDs.

Pros of an add-on CD

These are the advantages:

  • The interest rate is fixed: An add-on CD offers an opportunity to lock in a fixed interest rate. If market rates for CDs were to drop, you’re guaranteed to earn interest at the predetermined rate for the term.
  • The initial deposit required may be low: You might only need a few hundred dollars to open an add-on CD, whereas a traditional CD might require $1,000 or more.
  • You can continually deposit money: Unlike a traditional CD, you’re able to add money to an add-on CD before the CD matures. If you don’t have a large deposit to make upfront, you can continuously deposit money. This add-on CD feature could make it useful as part of a long-term savings strategy.

Cons of an add-on CD

These are the disadvantages:

  • Your money is locked away at a fixed rate: As with most CDs, you don’t have access to your money for a specified period of time, which could range from a few months to a few years. If CD rates increase during the term, you could be stuck with a lower rate.
  • Traditional CDs might offer a higher rate: The flexibility of the add-on CD comes with a trade-off. Add-on CDs generally have a lower yield than traditional CDs. “There’s going to be a cost for you to have the… luxury of being able to add more money to that CD,” says Mike Schenk, chief economist at the Credit Union National Association (CUNA).
  • There are penalties for early withdrawal: Typically, the longer the CD term you choose, the higher the interest rate you will receive. Although this makes a long-term add-on CD seem attractive, it comes at a price. If you need to break open your CD before it matures, then you will usually be forced to pay an early withdrawal penalty. With that in mind, it’s important to read the fine print of an add-on CD before taking the plunge.

Where to open an add-on CD

Not all financial institutions that offer traditional CDs offer add-on CDs. A few banks that offer add-on CDs are First Horizon Bank and Bank 5 Connect.

Before opening an add-on CD, you should compare CD rates with multiple financial institutions and consider market rates overall.

“Generally speaking, [CDs are] the sort of investment that you’d be most interested in when rates are high,” Schenk says. 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.

Besides comparing rates, read the fine print to make sure that you’re comfortable with the terms. After all, the funds will be locked in that CD for a set period of time. If you anticipate needing the funds before the maturity date, then consider other savings options, such as a high-yield savings account.

Bottom line

Once you have some savings tucked away, an add-on CD can be a practical place to store other funds. Not only will your initial savings grow, but you can add to your savings along the way. After the CD matures, you could consider renewing it or choosing another investment account to continue growing your savings.

However, it’s important to make sure that you won’t need to touch your savings for the duration of the CD’s term. It’s a good idea to have a separate emergency fund to avoid the need to take funds out of your CD early.

Check out our CD calculator to see exactly how much you stand to gain by stashing your savings in a CD.

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Written by
Sarah Sharkey
Contributing Writer
Sarah Sharkey is a contributing writer for Bankrate. Sarah writes about a range of subjects, including banking, savings tips, homebuying, homeownership and personal finance.
Edited by
Banking editor