What Is an Add-On Certificate of Deposit?

An add-on certificate of deposit is a certificate of deposit (CD) that allows the bearer to deposit additional funds, after the initial purchase date, that will bear the same rate of interest. Add-on certificate of deposits are commonly abbreviated as an add-on CD.

Key Takeaways

  • An add-on certificate of deposit is a CD that allows an addition of funds even after the initial purchase date.
  • Add-on certificates are most beneficial when investors feel interest rates will decline. However, interest rates are locked-in to the rate set at the beginning of the term period for the CD.
  • Early withdrawal from add-on CDs results in a penalty.

Understanding Add-On Certificate of Deposit

Add-on certificate of deposits differ from a traditional certificate of deposit, which stipulate that the account opener start an account by funding it with an initial balance. The balance is left untouched as interest accumulates and the account reaches maturation over a set period of time. Add-on CDs, on the other hand, allow for the account owner to make additional deposits.

An add-on CD provides the advantage of flexibility when compared to a traditional CD, because it allows the account owner to add additional funds to the account after opening. It can help an account owner reach a financial goal faster or provide a way to minimize spending. The number of deposits that the account owner can make varies among financial institutions; some allow for unlimited additional deposits, while others have a maximum deposit limit. However, most financial institutions that permit the use of an add-on feature will require these additional deposits to meet a minimum dollar amount, frequently $500.

An add-on CD is similar to a traditional CD because it locks in an interest rate at the opening of the account. The interest rate will remain the same no matter how many deposits you make over the lifetime of the CD.

Benefits of an Add-on Certificate of Deposit

Add-ons or add-ins to a certificate of deposit are beneficial when investors feel interest rates will decline. By having this feature, the bearer of the CD will be guaranteed a minimum interest rate return. This strategy is especially beneficial for long term add-on CDs and is not effective for short-term CDs. Both add-on and traditional CDs typically offer a higher interest rate than a bank rate, providing the opportunity for the account owner to potentially earn a higher rate of return on their money.

Downsides of an Add-on Certificate of Deposit

Although the owner of an add-on CD can make additional deposits throughout the account term, early withdrawals may result in a penalty, so you should evaluate if you anticipate needing the money before you open an account. Additionally, because you lock in the interest rate of the account at opening, you will not have the opportunity to switch to a higher interest rate in the event that interest rates change in the future. Financial institutions that issue add-on CDs can also limit the number of additions that you can make to the certificate during its term, thereby restricting returns available to the certificate holder.