What is an Add-On CD? Explanation, Pros & Cons

Article Summary:

A certificate of deposit (CD) is a solid and safe savings product that will typically garner you better interest rates than you could find with other savings tools such as a regular savings account. An add-on CD is a spin on the traditional CD, where you can continue to deposit additional funds into the CD account after you’ve already made the initial deposit.

Most people save by putting money into a savings account at their bank or credit union, which typically comes with a low fixed interest rate. Or maybe they use a money market savings account, which can be appealing because it usually has a slightly higher interest rate and shares some of its features with a checking account.

But depending on the market, purchasing an add-on certificate of deposit can offer a better interest rate than a standard bank or credit union. Plus, it gives you the opportunity to make additional deposits, adding more money to your savings as you’re financially able. Read on to learn more about add-on CDs as well as the pros and cons of this type of savings or investment product.

How add-on CDs work

When you purchase a traditional CD, you choose a CD term (usually anywhere between three months and 10 years), make an initial deposit, and then sit tight until the term is up. At the maturity date, you can either cash out if you need the money or choose to reinvest for another term.

Add-on CDs are a little bit different. The most important difference is the ability to add more money after the initial account opening, which is impossible with regular CDs.

The nice thing about this feature is it allows people to start saving money without having to come up with the $1,000 price tag that most CDs require to open an account. This is because the minimum deposit to open an add-on CD is typically lower than for other CDs.

It is critical to point out, however, that add-on CDs do come with some other requirements and restrictions. For example, you may be limited to a certain number of additional deposits or only be allowed to deposit in minimum increments. You could also be capped on the total dollar amount you can add to the account before it reaches maturity.

Plus, similar to standard CDs, you’ll incur an early withdrawal penalty if you need the money sooner than you had originally planned and before the term is up. As you do your research, be sure to check early withdrawal fees with each financial institution to get the best deal.

Add-on CD interest rates

Another issue to be aware of as you consider whether an add-on CD is right for you, is the interest rate. The flip side to the flexibility of add-on CDs is that they typically come with lower interest rates than standard CD rates. It may not be a deal breaker for you if you feel this is the right savings tool, but be sure to shop for the best interest rate as you explore your add-on CD options.

To get a better idea of the interest rates available on traditional CDs, take a look at some of the CD accounts below.

Why buy add-on CDs

Sometimes your personal finance situation doesn’t allow you to purchase traditional CDs because you’re only able to save a little at a time. In that scenario, putting your money into an add-on CD might be the right choice for you because it allows you to add money whenever you can.

For example, if you only have $100 for your initial investment, but you plan on saving an extra $20 a week or each paycheck, you might be able to have that money automatically deducted from your account and deposited directly into your add-on CD.

Another good time to buy an add-on CD, or any CD for that matter, is when the interest rates are high. CDs in general tend to follow federal rates, so when the Fed raises interest rates, CD rates typically increase as well. That’s a good time to buy, because once you do, you’re locked in at that interest rate no matter what happens with federal rates.

Pros and cons of add-on CDs

Certificates of deposit can offer a great way to make your money work for you. With higher interest rates than other savings accounts, you can earn more interest income as long as you don’t remove your funds too early. However, it’s important to remember that all investing tools have some risks, which you must consider before purchasing a CD.


Here is a list of the benefits and drawbacks to consider.

  • Built-in flexibility for your personal finance budget
  • Lower minimum deposit needed to open an add-on CD as opposed to a standard CD
  • Ability to make additional deposits up to the maturity date
  • Fixed interest rate = guaranteed return
  • Federally insured and protected by the FDIC
  • Early withdrawal penalties incurred if you need to withdraw money prior to maturity dates
  • Usually less competitive rates than with regular CDs
  • Bank or credit union may impose restrictions on how and when you can deposit additional money or the total amount you can add to it before the CD matures

Other savings options

If you decide the way an add-on CD works is not right for you, you might want to explore some alternative banking products that will assist you in your savings and financial planning goals. While the interest rates on these products aren’t as high, you may find that other differences make up for the smaller rates.

High-yield savings accounts

In many cases, a high-yield savings account can give you more competitive rates than you could find with an add-on CD, particularly with online banks. This means you can earn interest, have the ability to add funds as often as you like and have full access to your cash with no penalties.

The only major drawback to high-yield savings accounts, by comparison, is that the interest is not a fixed rate like with a regular CD or an add-on CD. This means that interest rates are subject to market fluctuations. Plus, the flexibility of easy access to your money could make it more difficult to save it rather than spend it.

CD ladders

Another savings option to consider is building a CD ladder. CD laddering means you purchase multiple traditional CDs at staggered maturity dates. The interest rate will typically be higher on longer-term CDs, but if you mix in some short-term ones as well you can have quicker access to some of your cash while still earning higher interest on the others. As time proceeds and CDs become mature, you can decide whether to hold onto the cash or reinvest it.

Pro Tip

If you want to save your money in a CD rather than another financial product, but worry about not being able to access your money before the entire term is up, consider a no-penalty CD instead. This way you can earn interest but still be able to access your money if you need it without incurring early withdrawal penalties. You can take a look at some of these no-penalty CD accounts below.


Are add-on CDs safe?

Standard CDs and add-on CDs are considered low risk financial products. In fact, the funds within these products are just as safe as the money you keep in a bank, credit union, or money market savings account, for example.

This is because all deposit accounts are federally protected through the Federal Deposit Insurance Corporation (FDIC) for banks or the National Credit Union Administration (NCUA) for credit unions up to $250,000.

Do I have to pay taxes on interest from an add-on CD?

Any interest that is earned from certificates of deposit is considered taxable income. This is true even if you reinvest the earned interest. The only way you won’t have to pay any taxes on CDs is if you hold them through your 401(k), IRA, or other tax-deferred retirement account.

What banks offer add-on CDs?

Not all banks or credit unions offer add-on CDs, so you may have to look around a bit to find one. A few to consider are First Horizon Bank, BMO Harris, and Bank of the West. Aside from online banks, there are some brick-and-mortar banks or credit unions that offer add-on CDs as well.

Before you commit to online options, you might want to conduct some research in your area to see if you can find better deals on interest rates and terms. For instance, the comparison tools above offer a great starting place to compare CD accounts and the financial institutions that offer them.

Key Takeaways

  • Add-on CDs allow you to make additional deposits after your initial investment.
  • An add-on CD is similar to most traditional CDs in that you get a fixed interest rate and need to wait for the maturity date to avoid early withdrawal penalties.
  • Add-on CDs don’t typically offer as competitive an interest rate as you can get with a traditional CD.
  • There may be restrictions with add-on CDs regarding how and when you can deposit additional funds.
View Article Sources
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  3. About NCUA — National Credit Union Administration
  4. What We Do — Federal Deposit Insurance Corporation
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