An add-on certificate of deposit (CD) is a unique savings option that functions like a traditional CD but with one key advantage — you can make additional deposits over time instead of being limited to a single upfront investment. While it follows the same term length and withdrawal restrictions as a standard CD, this flexibility allows savers to grow their balance gradually. Choosing the right savings vehicle can be challenging, especially when balancing liquidity, returns and risk. If you’re unsure how an add-on CD fits into your financial strategy, a financial advisor can help you determine the best approach for your savings and investment goals.
What Is a Certificate of Deposit?
A certificate of deposit, or CD, is an investment product offered by banks that puts your money on deposit with the bank making the offer. The bank holds it in an account in the same way that they do with a checking or saving account. However, you cannot withdraw this money for a specific period of time.
For example, say you buy a 60-month certificate of deposit for $1,000. This means that you put $1,000 in a specialized account and cannot withdraw it for five years, or 60 months. If you withdraw the money early you typically pay a penalty fee.
A certificate of deposit account generates interest just like any other bank account. This is the return that the bank pays in exchange for using your money. However, a CD pays extra interest because you’ve agreed to leave the money on the deposit for a specific amount of time.
How Certificates of Deposit Work
For example, many checking accounts offer interest rates between 0.01% and 0.1%. Occasionally you will find high-interest checking accounts that can go as high as 0.5%, but these are uncommon and typically reserved for large deposits. By contrast, you can find CDs that pay as much as 3% interest on your deposit. At the end of the deposit period, your CD matures. You receive back all of the money you invested plus interest in one lump sum.
A certificate of deposit is generally seen as a high-security, low-return product. You can’t take your money out at will, so this isn’t good for spending or other uses that require a liquid asset. As a long-term investment product, though, this is about as secure as it gets. You have the backing of your bank and the FDIC to make sure that you get this money back.
But this can be a very low return product. While some CDs can, indeed, offer rates around 3% or higher, banks typically reserve those returns for long-term deposits (10 years or more) in very high amounts ($100,000 or more). Standard CD rates are generally low, to the point where the difference between a CD and a savings account can be negligible. For example, at the time of writing Bank of America offered a 0.01% interest rate on savings accounts and a five-year, $10,000 certificate of deposit for 0.03%.
The difference of 0.02 percentage points is an extremely low rate of return in exchange for locking your money away for five years.
What Is an Add-On Certificate of Deposit?
An add-on CD works in most respects just like an ordinary certificate of deposit. You open an account with the bank. The bank holds your money for a minimum amount of time and, in exchange, pays you a higher rate of interest than normal. The difference is that you can add funds to this account as time goes on.
An ordinary CD is structured as a certificate, as the name suggests because it’s a single asset. Although the money is held in an account, you make one lump-sum investment. The bank holds it and pays you a guaranteed return based on your initial investment.
An add-on CD works more like a bank account. You can make additional deposits to this account over the lifetime of the asset. When the certificate matures, you receive back all of the money that you invested over the lifetime of the asset along with your interest payments.
Example of an Add-On CD
Let’s suppose you open a 60-month certificate of deposit (CD) with an initial deposit of $1,000. Over the next five years, you gradually contribute an additional $4,000. When the CD matures, you’ll receive your total $5,000 principal plus the interest accrued over time.
Like all CDs, the interest rate is locked in when you open the account, meaning the bank cannot adjust it based on how much or how little you deposit. However, interest only accumulates on the funds currently in the account — so as you add more money, the CD earns more interest.
An add-on CD can be a great option for investors who don’t have a large lump sum to invest upfront. Traditional CDs often require a minimum deposit of $1,000 to $10,000, which can be a barrier for some. Add-on CDs provide a more flexible alternative, allowing investors to start with a smaller amount and build their savings over time. However, this flexibility comes with a trade-off—the interest rate is typically based on your initial deposit. If you plan to hold the CD for several years, it may be worth saving up first to secure a higher rate.
It’s also important to note that add-on CDs are relatively rare. While they are offered by some mainstream financial institutions, finding one may require shopping around.
Bottom Line
Add-on CDs are certificates of deposit that allow you to invest additional funds during the lifetime of the asset. When your CD matures, you receive back all of the funds you put in plus interest. This can be the right investment if your personal financial situation and goals align with the potential outcome. Working with a financial advisor can help you determine if it’s a good fit, in case you’re not sure.
Tips for Investing
- If you’re thinking about making a long-term financial plan then you should consider working with a financial advisor. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Certificates of deposit are considered one of the safest investments available today. Now take a look at nine other assets for investors looking to protect their money.
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