What Is an Add-On CD?

Today’s interest rate environment makes CDs look very appealing, but you might be worried about one typical piece of the CD puzzle: the need to hand over all your funds at once. However, that requirement isn’t part of the deal with all CDs. Add-on CDs are an exception to the rule, giving depositors more flexibility to make contributions throughout the term.

Read on to learn more about how add-on CDs work and whether one makes sense for your money.

What is an add-on CD?

An add-on CD is a type of specialty CD that lets you contribute money throughout the term, instead of requiring the full deposit within a few days of opening the accoun as standard CDs do. Some institutions might call these add-to CDs, but regardless of the name, the methodology is the same: You get to contribute more cash, which means earning more interest.

However, like most traditional CDs, it’s a one-way street. You can’t take out money whenever you like -- early withdrawals typically incur a penalty. 

How does an add-on CD work?

If you were opening a traditional 12-month CD with a lump-sum deposit of $1,000 at an annual percentage yield, or APY, of 5%, you’d be on standby for a year until the CD reached maturity, at which point you’d have $1,050.

With an add-on 12-month CD, you’ll still make an initial deposit, but you’ll be able to make more deposits (up until the maturity date) that earn the same APY you locked in when opening the account. So, let’s say you deposit $1,000 in an add-on CD that earns 4% APY. At the halfway point, you’ve earned $19.80 in interest (your balance is now $1,019.80), and you decide to deposit another $1,000. That extra cash earns the same 4% APY, and you’ll have around $2,060 at full maturity. 

A great thing about an add-on CD is you can schedule recurring deposits. For example, you might schedule an automated deposit of $100 every month to take advantage of your add-on CD flexibility.

Pros and cons of add-on CDs

Before you start looking for add-on CDs, consider the advantages and disadvantages. 

On the plus side, you’ll lock in the interest rate while giving yourself the chance to grow that balance until the end of the term. And if you don’t have a lot of cash to meet a minimum balance requirement, it’s OK. Most add-on CDs don’t have large deposit obligations. 

On the negative side, that convenience comes with a cost. Add-on CDs tend to offer lower interest rates than traditional CDs. They also aren’t widely available, so you’ll need to search for one. Additionally, you’ll still be on the hook for an early withdrawal penalty if you need the cash before maturity.

Add-on CDs vs. traditional CDs

If you’re weighing whether an add-on CD or a traditional CD is right for you, it ultimately comes down to whether you have the full amount you want to lock away right now or if you need the flexibility to make additional deposits.

The key selling point of add-on CDs is the chance to contribute more money over time. The big attraction of traditional CDs is the chance to score a higher interest rate. But unless the CD allows for early withdrawal, expect to pay a fee that could equal a few months’ interest if you need access to your funds before the term ends.  

If an early withdrawal penalty makes you skeptical of opening a CD, you have other options. Some online banks are paying fairly generous rates for no-penalty CDs. With a no-penalty CD, you likely won’t get the benefit of being able to add money to your initial deposit, but you’ll be able to take your money out before the CD matures at no cost.

When should you invest in an add-on CD?

If you can’t meet the minimum deposit requirements for a traditional CD, an add-on CD may be a good choice. Or, if you’re expecting to receive additional payments throughout the term -- a quarterly commission, for example -- you can use an add-on CD to stash that money away when you receive it to earn more interest. 

On the flip side, if you don’t expect to have additional funds to contribute during the term, you’re better off with a traditional high-yield CD that will probably pay a higher rate.

Where to invest in an add-on CD

Finding an add-on CD isn’t easy. Most banks and credit unions offer traditional CDs, but few will give you a guaranteed rate with the flexibility to add more money. None of the standard big banks or the most recognized names in online banking offer add-on CDs. 

Here’s a rundown of add-on CD offerings:

• Bank5 Connect Investment CD: This 24-month CD offers a 3.30% APY with the ability to add money throughout the two years. There’s a $500 minimum deposit. (See CNET’s Bank5 Connect review to learn more about this bank.)
• Associated Bank: This bank’s 12-month add-on CD pays a 2% APY and has a minimum opening deposit of $100.
• Fairwinds Credit Union: The credit union’s six-month add-on CD pays 1% APY, while its 12-month add-on CD pays 1.60% APY. The minimum deposit is just $100.

Alternatives to add-on CDs

Add-on CDs aren’t the only game in town. There are plenty of other ways to give yourself some extra flexibility with your saving strategy.

• High-yield savings accounts and money market accounts: These are much easier to find, and you can regularly contribute more money to either of these accounts without any worry about early withdrawal penalties or term lengths. However, rates on these accounts are variable. So, while an add-on CD will lock in your earning potential, your interest earnings may go up or down with either of these options.

• CD laddering: Instead of locking in one interest rate with the ability to add more money to that account, a CD ladder can help you take advantage of potentially higher interest rates down the road. For example, instead of opening a two-year add-on CD, you could spread that initial deposit across a few different term lengths -- a three-month CD, a six-month CD, a 12-month CD and an 18-month CD, for example. Then, as each CD matures, you can either cash out, get a new CD at a new rate or reinvest in the CD term.

FAQs