Add-On CDs: Meaning, Pros and Cons, Example

What Is an Add-On CD?

An add-on CD is a special type of certificate of deposit (CD) that allows you to continue adding funds to your account. This differs from standard CDs, which limit you to an initial deposit. Both types of CDs involve earning a guaranteed interest rate on your funds for a set time period—usually 3 months to 5 years. But add-on CDs often pay a slightly lower interest rate in exchange for the flexibility to make more than one deposit.

Key Takeaways

Add-on certificates of deposit (CDs) allow savers to make additional deposits into a CD account throughout the maturity term.
You may earn a lower interest rate with an add-on CD compared with a traditional CD, which only allows you to deposit money at the beginning of the maturity term.
Like standard CDs, add-on CDs will charge early withdrawal penalty if you take money out of the account before maturity.
Creating a CD ladder can help with minimizing penalties while maximizing interest rates.

How an Add-On CD Works

When you open a CD account, you’re agreeing to keep your savings in place for a set time period. This is the CD’s maturity term, and, depending on the CD, it can be as short as 30 days or as long as 10 years. In exchange, the bank or credit union agrees to pay you interest on the money that you deposit.

Ordinarily, you would not be allowed to add more money to the CD once you’ve made your initial deposit. With an add-on CD, however, you can continue adding money to your account through the maturity date of the CD. For example, you may be able to schedule automatic deposits on a monthly or biweekly basis, depending on how often you’re paid.

In terms of how to add money to a CD, this can depend on the bank or credit union that holds it. For example, you may be able to schedule automatic transfers from a linked checking account or savings account, or you may be able to deposit cash or a check with a teller in person or at the drive-thru window.

The bank or credit union may limit the number of additional deposits that you’re allowed to make or may cap the total amount of money that can be deposited into an add-on CD.

Add-On CD vs. Traditional CD

The biggest difference between add-on CDs and traditional CDs is the way that they’re funded. Again, a traditional CD only allows you to deposit money once, when you open the account. Add-on CDs give you the option to add more through the maturity term.

Aside from that, however, other things can distinguish add-on CDs from other CDs, including:

Minimum deposit requirements
Interest rate
Annual percentage yield (APY)
Early withdrawal penalties

You may be able to open an add-on CD with a smaller amount of money than you would by opening a traditional CD. For example, you may be able to open an add-on CD with just $100, compared with $1,000 for a regular CD. That’s a plus if you’re just getting started with saving.

Still, there may be a tradeoff when it comes to interest rates. Banks and credit unions may offer a higher rate to savers who choose regular CDs over add-on CDs, so it’s important to consider what matters more to you: earning a higher rate, or being able to add money to your CD over time.

If you would like to avoid an early withdrawal fee, consider a no-penalty CD instead. This allows you to withdraw funds prior to maturity without sacrificing interest earned.

Advantages and Disadvantages of Add-On CDs

Add-on CDs may be more appealing to certain types of savers than others, particularly if you’re just getting started with saving. That said, there are some potential drawbacks to consider before opening this type of CD account.

Pros

Low minimum deposit. While regular CDs may require you to deposit $500, $1,000, or more initially, it may be possible to open an add-on CD with as little as $100.
Guaranteed return. Just like traditional CDs, add-on CDs can offer a fixed interest rate for the entire maturity term, guaranteeing you a set amount of return.
Flexibility. Add-on CDs allow you to grow your savings over time at a pace that works for your budget.

Cons

Lower rates. Compared with traditional CDs, the interest rate that you earn with an add-on CD may be lower.
Guaranteed return. If your add-on CD has a fixed rate, you wouldn’t benefit from any interest rate increases that occur during the maturity term as you would with a variable interest rate, potentially earning you more money.
Early withdrawal penalties. Even though you have the option to add money to an add-on CD over the course of the maturity term, you may not be able to take out money prior to maturity without a penalty.

Opening a CD ladder that includes multiple add-on CDs can help you minimize the odds of triggering an early withdrawal penalty while taking advantage of changing interest rates over time.

Example of an Add-On CD

Say you open an add-on CD with a 24-month term. Your initial deposit is $100, and you plan to deposit an additional $500 per month into your CD. The CD earns a 0.50% APY. After two years, you would have saved $12,100 (your $100 initial deposit plus your $500 monthly contributions for 24 months). Assuming a 0.50% APY, compounded monthly, you would have earned $58.68 in interest. But how does that compare with a regular CD?

Say that you take the entire $12,100 and deposit it into a traditional two-year CD earning the same 0.50% APY. In that scenario, your CD’s value would grow to $12,221.58. You would earn $62.90 more by depositing the entire $12,100 up front. However, that may not be realistic if you don’t have a lot of money to save, in which case the add-on CD could be the better savings option.

Add-on CDs, like other CDs, savings accounts, and money market accounts, are eligible for Federal Deposit Insurance Corp. (FDIC) protection, up to the allowed limits per depositor, per account ownership type, per financial institution.

What are the advantages of an add-on certificate of deposit (CD)?

Add-on certificates of deposit (CDs) are a great option for investors who want security and flexibility. You can start with a low initial deposit and add funds as your budget allows. All of the money that you invest in an add-on CD is insured by the Federal Deposit Insurance Corp. (FDIC).

Can you add to a CD after opening?

Most CDs do not allow you to contribute funds after the initial investment. For a lower interest rate, add-on CDs do allow you to deposit more throughout the term. Increasing your CD account can improve your rate of return in the end.

What are the disadvantages of an add-on CD?

There are disadvantages to add-on CDs, starting with a lower—and sometimes fixed—interest rate. Additionally, if you need to access your money before the maturity date, there will be penalties. Make sure to consider these disadvantages as you invest.

The Bottom Line

Opening an add-on CD account could make sense if you want to earn a competitive interest rate with a CD account while being able to add money at other times. Remember to compare rates, minimum deposit requirements, and rules regarding additional CD deposits when deciding which one to open. Also, keep early withdrawal penalties in mind when searching for the best CD rates. A steep penalty could negate any interest earned if you have to withdraw money from your CD before the maturity date.