Add-On CDs

An add-on certificate of deposit (CD) is an interest-bearing, time deposit account offered by banks and credit unions. Unlike a traditional CD, an add-on CD allows an account holder to add to their savings balance prior to maturity. Learn about the pros and cons to determine whether it’s right for you.

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  • Written By
    Thomas J. Brock, CFA®, CPA

    Thomas J. Brock, CFA®, CPA

    Investment, Corporate Finance and Accounting Professional

    Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

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    Lamia Chowdhury
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    Lamia Chowdhury

    Financial Editor

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    Peggy James, CPA
    Peggy James CPA

    Peggy James, CPA

    Independent Accountant and Financial Coach

    Peggy James is a certified public accountant with a Master of Accounting. She has spent the past several years of her career focused on working in higher education finance roles. Peggy also has accounting and finance experience working in the corporate and nonprofit sectors.

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  • Updated: November 8, 2023
  • 5 min read time
  • This page features 3 Cited Research Articles

Key Takeaways

  • An add-on certificate of deposit allows an account holder to make additional deposits to a CD account any time during the maturity term.
  • Generally, add-on CDs have lower account minimums than traditional CDs with equivalent-maturities, but they offer relatively lower interest rates.
  • The add-on flexibility is useful, especially if you don’t have a lot of investable cash but expect to accumulate some over time.

What Is an Add-On CD?

An add-on is a special type of CD that allows an account holder to make additional deposits to an account any time prior to maturity, whereas a traditional CD entails a single, upfront deposit.

A traditional certificate of deposit (CD) is a type of savings account offered by banks and credit unions to their customers. It provides the account holder a guaranteed rate of interest in exchange for a commitment to leave their savings in the account for a specified amount of time. Generally, early withdrawal of the money will trigger a loss-of-interest penalty.

Did You Know?

Most CDs have a maturity date that is somewhere between one month and five years. Typically, the more money invested and the longer term, the higher the interest rate offered.

How Does an Add-On CD Work?

The process for investing in an add-on CD begins the same way as the opening of a traditional CD. You are required to apply in-person or online with the issuing financial institution. The primary difference is that for a traditional CD, the principal invested will not change, but for an add-on CD, you have the option to increase the amount of principal invested.

For illustrative purposes, consider the following example:

  • You buy a $10,000 add-on CD on January 1, 2023.
  • The term is five years (maturity on January 1, 2028), with an annual percentage rate (APY) of 4%. Interest is paid annually.
  • Add-on deposits are permissible at the account holder’s discretion.

During the first year, you earn $400 of interest ($10,000 × 0.04 = $400). Then, at the beginning of each subsequent year, you make add-on deposits of $2,000.

The add-ons enable you to earn the following annual interest amounts:

  • Year 2 Interest Income = $12,000 × 0.04 = $480
  • Year 3 Interest Income = $14,000 × 0.04 = $560
  • Year 4 Interest Income = $16,000 × 0.04 = $640
  • Year 5 Interest Income = $18,000 × 0.04 = $720

The issuing financial institution may limit the number of deposits that can be put into an add-on CD account. It may also cap the total amount of money that can be deposited into the account.

How Do Add-On CDs Compare to Traditional CDs?

Beyond the ability to make additional deposits, there are a few other notable differences between add-on CDs and traditional CDs.

3 Ways Add-On CDs Differ From Traditional CDs

  1. Add-on CDs are less common than traditional CDs, so the tenures offered for these instruments are relatively limited.
  2. The minimum deposit requirements for add-on CDs are usually lower than those associated with traditional CDs. This is largely because financial institutions recognize the market for add-on CD accounts is filled with people who gradually accumulate cash.
  3. The interest rates offered on add-on CDs are often lower than those offered on traditional CDs. This is because investment flexibility comes at a cost.

Pros and Cons of Add-on CDs

Certificates of deposit are arguably the safest investment vehicles in which you can invest. When structured properly, a CD is fully insured up to $250,000 for an individual account and $500,000 for a joint account.

The Federal Deposit Insurance Corporation (FDIC) insures CDs issued by banks, while the National Credit Union Administration (NCUA) insures CDs issued by credit unions.

However, CDs also have a few notable disadvantages.

For longer-maturity CDs, a significant disadvantage is inflation risk. For these instruments, a spike in inflation can overshadow the fixed-rate income they provide. Ultimately, this reduces the purchasing power of CD investors.

Another notable disadvantage is the inherent illiquidity of CDs. As mentioned above, CDs require you to lockup your money for a specified amount of time. Early withdrawals are subject to loss-of-interest penalties and, in some situations, loss of principal is possible.

An add-on CD provides some protection against liquidity risk, given the fact it allows for incremental deposits. So, once a deposit is made, it is subject to a lockup requirement.

Who Should Invest in Add-On CDs?

A CD is a good idea for anyone that seeks a high-quality, stable-value investment that kicks off guaranteed interest and is willing and able to lockup cash for a specified amount of time. For many people, CDs serve as a relatively short-term complement to a broader portfolio of long-term holdings, including stocks, bonds and alternative investments.

When it comes to investing in an add-on CD or a traditional CD, the most important considerations are the amount of investable cash you have and the flexibility you desire. An add-on CD is optimal for an investor that has a relatively small amount of investable cash and values the ability to add to an investment when their budgetary situation allows for it.

Other Frequently Asked Questions

What is a bump-up CD?

A bump-up CD is a type of certificate of deposit that allows an account holder to increase the interest rate on the account prior to maturity. Generally, this can only be done once, but some longer-maturity CDs allow for multiple bump ups.

What is a step-up CD?

Like a bump-up CD, a step-up CD allows for interest rate increases during a CD’s term. However, a step-up CD’s increases are automatically initiated per terms established by the issuing bank or credit union, whereas a bump-up’s increases are conditionally initiated by the account holder.

What is the best alternative to a CD?

Arguably, the best alternative to a CD is a high-yield savings account. Typically offered by online banks, these savings vehicles are very competitive from an interest rate perspective, and they do not require you to lock up your money. However, unlike fixed-rate CDs, the interest rates offered on these accounts can change at any time.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: November 8, 2023