Key takeaways

An add-on CD is a specialty CD that allows you to add more funds to the account after your initial deposit.

Like standard CDs, add-on CDs lock in your funds at a fixed rate for the duration of the term.

A downside of add-on CDs is they tend to earn lower rates than standard CDs that only permit an initial deposit.

An add-on certificate of deposit (CD) is a specialty CD that allows you to earn some interest with minimal risk. The key benefit of these CDs is the ability to add more money after you've opened the account. This perk makes add-on CDs more flexible than standard CDs, though add-on CDs still have some restrictions and caveats to watch out for.

In this article we'll touch on when an add-on CD may be a good choice as well as when it's good to opt for a standard CD (or a savings account) instead.

What is an add-on CD?

An add-on CD is a special type of CD offered by some banks and credit unions that allows you to deposit more money into the account after your initial deposit.

With a traditional CD, money is deposited at the beginning of the term and left to generate interest for a defined period. Add-on CDs, on the other hand, permit multiple deposits throughout the term.

Just like with a traditional CD, a specific annual percentage yield (APY) is locked in for the entire term of the add-on CD. This rate remains the same even when you deposit more money into the account.

How add-on CDs work

The process for opening an add-on CD is similar to opening a traditional CD: Money is deposited into the account for a set period and with a fixed APY.

However, after you make an initial deposit into an add-on CD, you have the option to increase the amount in the account over time by adding money to it.

Say, for example, you open an add-on CD with a two-year term that earns an APY of 3 percent. You make an initial deposit of $2,500 and plan to deposit another $500 each month until the CD matures. After the two-year term ends, you'd have saved $14,500 and earned around $500 in interest.

The ability to add money as time progresses means you can potentially earn much more interest than you would by only making an initial deposit.

Can you add money to a CD before it matures?

An add-on CD permits you to add funds to the account before it matures, which isn't an option with traditional CDs. The ability to add money later on could be a boon for savers who are able to only put small amounts away at a time.

"Not everyone has the lump [sum] available to invest in a CD," says Molly Ford-Coates, founder of Ford Financial Management based in Warner Robins, Georgia. "The add-on option allows you to add more money as it becomes available to you."

The financial institution may restrict the total amount of cash that can be deposited or only allow deposits from certain accounts. The added deposits will grow at the same fixed interest rate as the original CD deposit.

Check out Bankrate's CD calculator to see how much could be gained by investing in a CD.

Pros and cons of add-on CDs

Like all financial products, there are pros and cons that come with an add-on CD.

Pros

Fixed interest rate: If market rates for CDs were to drop, you're guaranteed to earn the predetermined yield for the term.

Low initial deposit requirement: Some banks may have lower minimum deposit requirements for their add-on CD products than for opening traditional CDs.

Money can be added after account opening: If you don't have a large deposit to make up front, you can continuously deposit money as part of a long-term savings strategy.

Cons

No rate increases: As with most CDs, the money in the account has a fixed rate for a specified period. If CD rates increase during the term, you could be stuck with a lower rate.

Traditional CDs might offer a higher rate: Choosing an add-on CD over a traditional CD may mean going with the option that has a lower yield.

Early withdrawal penalties apply: Unless there are early withdrawal allowances specified in the CD's terms, you'll usually pay an early withdrawal penalty for taking money from the CD before its maturity.

Not easy to find: Though traditional CDs are widely offered by many banks and credit unions, only a small selection offer add-on CDs.

CD ladders offer greater flexibility

CDs are, by design, inflexible. Once you commit your money to a CD, you can't get it back or add more until the CD matures, unless you're willing to pay an early withdrawal penalty fee. Add-on CDs relieve some of this inflexibility, letting you add additional deposits but does little to help if you need to make an unexpected withdrawal.

CD laddering is a strategy you can use with either traditional or add-on CDs, giving you more opportunities to access your cash without paying an early withdrawal penalty. Instead of opening a single CD, with a CD ladder you split your money between multiple CDs and stagger their maturities, giving you more frequent opportunities to make withdrawals.

For example, instead of opening a $4,000 CD with a one-year term, you could open four separate $1,000 CDs with terms of three, six, nine and twelve months.

Now, every three months, you have the option to take some of the money out of your CD ladder. If you want to keep the money in the account, you can renew them as one-year CDs.

This balances flexibility with the higher returns offered by CDs. You'll get the higher interest rate of a CD while regularly having the option to take some money out of the account.

Where to open an add-on CD

Not all financial institutions that offer traditional CDs offer add-on CDs. Some institutions that offer add-on CDs are Bank5 Connect, Fairwinds, and Boeing Employees' Credit Union.

Before opening an add-on CD, compare CD rates among several financial institutions and consider overall market rates.

When does an add-on CD make sense?

Add-on CDs are a good option for savers when they might not initially have all of the funds they ultimately want to deposit. They can deposit what money is available initially and add to the CD's sum up until the maturity date.

Savers may also want to consider market rates overall to see if it's a good time to invest in an add-on CD.

"Generally speaking, [CDs are] the sort of investment that you'd be most interested in when rates are high," says Mike Schenk, chief economist of the Credit Union National Association. That's because if you lock in a long-term CD when market rates are low, you could miss out on return when rates start trending back upward.

In addition to comparing rates, review the CD's terms and disclosures to see if there are specific requirements or penalties. If you anticipate needing the funds before the maturity date, consider other savings options that allow for more access to your money, such as a high-yield savings account.

Bottom line

Once you have some savings tucked away, an add-on CD can be a practical option for storing and building up funds. Not only will your initial savings grow, but you can add to your savings along the way. After maturity, many accounts allow the account holder to renew the term, or you could use the extra savings for other investments.

Keep in mind that the funds in the CD will not be available for the duration of the CD's term. It's a good idea to have a separate emergency fund to avoid the need to take funds out of your CD early.

-Freelance writer TJ Porter contributed to updating this article.