Traditional certificates of deposit, or CDs, operate with a set-it-and-forget-it approach: You make one big deposit when you open the account, and you wait until the maturity date to withdraw those funds – plus the interest. That’s great if you’re sitting on a sizable sum of cash you want to lock away for a set period of time.
Let’s say, however, that you don’t have much money right now, and you want to make ongoing deposits to a CD to save for a future expense. Is it possible? The answer is yes. You’ll need to open an add-on CD.
What is an add-on CD?
Add-on CDs give you the ability to make additional (hence the “add”) deposits after you open the account. 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. Add-on CDs feel somewhat similar to a savings account. You can schedule recurring deposits to grow the balance.
But, similar to most traditional CDs, it’s a one-way street. You can’t make early withdrawals without paying 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.
Pros
A fixed interest rate – even if rates drop, you still get your same APY.
Ability to add more funds throughout the term.
Chance to open a CD without a big deposit.
Cons
Rates are typically lower than traditional CDs.
You’ll still pay an early withdrawal penalty if you need the cash before maturity.
Not widely available.
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. (Read CNET’s Bank5 Connect review.)
First Horizon Bank Add-On CD: You’ll need to deposit a minimum of $500, and you can make one penalty-free withdrawal every six months. However, this add-on CD pays only 0.10% APY. You can find significantly better earning potential elsewhere.
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
Add-on CDs allow you to make additional deposits prior to maturity date, while regular CDs require your full deposit upfront – with no option to contribute more money during the term. Add-on CDs tend to offer lower interest rates than regular CDs. Unless early withdrawal allowances are specified in the CD’s terms, both impose fees if you need the funds prior to the maturity date.
With traditional CDs, you can make a deposit only at the beginning of the term. Add-on CDs, however, are designed to let you add more money throughout the entire term.
CDs are one of the safest investments you can possibly make, thanks to FDIC insurance and fixed interest rates. Plus, there are many different types of CDs, which gives you some extra flexibility. However, CDs aren’t for everyone. Depending on your age, your investing goals and your risk tolerance, there may be better options for your money. If you’re having trouble determining the best move, talk to a financial planner about your goals.
Yes. You can spread your money across multiple types of CDs – a no-penalty CD, a traditional CD and an add-on CD, for example. One of the most common approaches to CD investing involves spreading your money across multiple CD term lengths. This is called CD laddering. When one CD matures (reaches the top rung of the ladder), you can reinvest that money (making it the lowest rung on the ladder) to continue your cycle of low-risk investing.