What is an Add-On CD?

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Point of Interest

Add-on CDs provide an extra layer of flexibility for people looking to invest money but who might not be ready to put up all the funds today.

When it comes to stable and risk-free savings tools and investment opportunities, certificates of deposit (CDs) generally lead the conversation. As you might expect (or already know), there are plenty of different types of CDs that you can invest your money in. One type that you may not have heard of, though, is an add-on CD. If you’re wondering, “What is an add-on CD?” and how it might play a helpful role in your savings plans, stay tuned.

How does an add-on CD work?

Once people start seeing the returns from CDs or see interest rates dropping, the question of can you add money to a CD may come up. Generally, you’re not able to. Traditional CDs only allow you to invest money when you open the account. However, add-on CDs give investors the chance to add more money to an already-opened CD account. This lets you take advantage of the interest rates you’ve locked in without the need for all of the funds to be invested on day one.

But, as you might expect, there are some limitations to add-on CDs. These limitations will vary greatly by provider. Some of the different limitations include the time frame when you can add more money to the CD, the amount you can add, the guaranteed or minimum interest rate and the cost (if any) of adding the extra cash.

The ideal, unicorn add-on CD lets you add as much money as you want, whenever you want, for no cost and at an attractive interest rate. In reality, though, it’s going to be hard to find an add-on CD that encompasses all of these features. That being said, you can find add-on CDs that have some or most of these features. Before opening an account, however, make sure to avoid common mistakes by doing your diligence when it comes to shopping around, checking terms, etc.

When I should get an add-on CD

  • When you expect interest rates to drop — One of the biggest advantages of add-on CDs is the ability to invest more money at a later date at an agreed-upon interest rate. If you expect interest rates to drop below the current rate you’re locking in, an add-on CD might be a great idea. This would give you the ability to add money later at a higher interest rate than is available on the open market. Keep in mind, though, that you may get a lower rate now with an add-on CD versus a traditional CD. Make sure to calculate this into your investment plans.
  • When you plan to invest more money — Sometimes, you don’t have the full amount that you want to invest on day one. Or you may be expecting a sum of money to come in from something like the sale of an item you own, another CD coming to maturity or another investment becoming liquid. If you want to invest these funds in your CD but don’t want to wait until later to start earning, consider an add-on CD.
  • When you are unsure or want flexibility — If you can get an add-on CD with a comparable or equal rate to a traditional CD, it would be a great idea to take advantage of the essentially free flexibility. In these cases, there is no downside to your investment. If rates go down, you can always take advantage of your add-on CD’s locked-in rate. If rates go up, you can open a new traditional CD separately. And if you decide later that you don’t want to add any more money to your CD investments, that’s still an option.

When I shouldn’t get an add-on CD

  • When you expect interest rates to rise — Add-on CDs give you the ability to add more money to an existing account at an agreed-upon interest rate or guaranteed rate minimum. If you expect that rates down the road will be higher, you might consider choosing a traditional CD if it carries a higher interest rate now. If the rates on traditional CDs are the same as the add-ons (and there is no requirement to invest more money), then you might as well take the add-on CD and leave your options open. You can always open a new CD if rates do increase.
  • When rates are better on traditional CDs — Sometimes the rates you get with add-on CDs may be lower than what you’ll get with a traditional CD or a traditional jumbo CD. Generally, the lower rate may be the trade-off for the flexibility to invest more money at a later date. If you have all of the funds you want to invest now, you may be better off taking the higher rate and forgoing the added flexibility.
  • When liquidity is a concern — While add-on CDs do give you added flexibility for adding funds to your investment, the restrictions on withdrawing are the same. If you access your funds early, you will incur an early withdrawal penalty. For investors that are worried about this, you might want to avoid certificates of deposit altogether. A better option might be a high-yield savings account. Savings accounts give you added liquidity and the freedom to add funds whenever you want but don’t guarantee a rate of return.

The final word

Add-on CDs can be a great addition to your investment portfolio when you need flexibility in adding your funds. These CDs may be tougher to find, though, and there are some factors to consider. Make sure you look at the interest rate you’re getting now, the rate you’re locking in and what the limitations or costs of investing at a later date might be. If you can earn a higher rate of return based on what you expect the interest rates to do, go for it! If not, you can always put your money into traditional CDs and open a new CD or investment account down the road when you have access to additional funds.

Jason Lee

Personal Finance Contributor

Jason Lee is a seasoned copywriter with a passion for writing about banking, tech, personal growth, and personal finance. As a business owner, relationship strategist, and officer in the U.S. military, Jason enjoys sharing his unique knowledge base and skill set with the rest of the world.