Add-On Certificate of Deposit (Add-On CD): What It Is, Pros and Cons, Examples

Add-On Certificate of Deposit (Add-On CD): What It Is, Pros and Cons, Examples

An Add-on certificate of deposit (Add-on CD) is an interest-bearing special type certificate of deposit (CD) that allows the account holder to add further deposits after parking the initial deposit funds.  A regular CD doesn't allow additional deposit flexibility through the maturity period.

Add-on CD

Key Takeaways for Jumbo CD:

• An Add-on CD allows you to add money to a certificate of deposit (CD) account.
• An Add-on CD provides a guaranteed rate of returns, with a low minimum deposit requirement.
• A limited number of financial institutions offer add-on CDs in the market.

What's an Add-on CD?

A certificate of deposit is a savings account that earns fixed earnings, is a risk-free investment, and is federally insured. It accepts one-time deposits during the CD's maturity period and disallows additional deposits. All investments come from savings. However, an Add-on CD gets exceptions to it. The limitation of a one-time deposit is finding a sound match to the Add-on CD. 

An Add-On CD is issued by banks and credit unions, ensuring guaranteed and risk-free returns. The major difference between an Add-on CD and a traditional CD is the flexibility of adding funds after opening a CD account. It approves an extension to the deposit of the balances. Ideally, the total cap is divided over scheduled payments. 

How Do  Add-on Certificates Work?

When opening a CD account, you place funds once time for a stated term and keep on earning rates. You can't withdraw funds during the CD's lifetime, otherwise, financial penalties may eat up the earnings.[1]. 

This liquidity limitation can be served from a no-penalty certificate of deposit (no-penalty CD).

The specialty of CD decides its terms, conditions, withdrawal process, and maturity period. The maturity period can be as short as 3 months or as long as 10 years. 

Each specialty CD adds some limitations. These limitations are not CD drawbacks but they need to be sorted out as the best savings choices for the savers. You just need to match these limitations to your financial goals to evaluate what type of CD suits you.  

A typical CD allows one-time funds to be deposited at the time of the opening of a CD savings account. After that, no further deposits in CD accounts are allowed and entertained anyway. 

This restriction matches a solution in the form of an Add-on CD. An Add-on CD authorizes adding up funds after the initial deposit. This allows you to make profits on the initial deposit and the funds you continue depositing after that.

 

The issuer of an Add-on CD can limit the number of deposits or cap the total amount that you are eligible to deposit funds and be entertained earnings.

 

A bank or credit union may receive recurring deposits through scheduled payments or an electronic transfer. 

Add-on CDs Vs. a Traditional CD

Apart from the main difference in the contribution flexibility after the initial deposit, there are some noteworthy points.

• The requirement of minimum deposits for an Add-on CD is usually low. 
• Add-on CD faces financial penalties in case of funds withdrawal before maturity. A no-penalty CD finds exceptions, and you can withdraw funds without incurring penalties.
• Banks or credit unions may offer lower interest rates on Add-on CDs than traditional CDs. 

 

All CDs are not for all savers or investors. An investor and a specialty CD find a sound match based on the interest rate, maturity period, flexibility of early withdrawals, and minimum deposit requirement.

What Are the Pros and Cons of  Add-on CDs?

Before selecting an Add-on CD for investment, you may come up with some downsides like other financial instruments.  An advantageous CD should fulfill the financial goals.

Advantages:

    1) Deposits Flexibility:

Add-on CD provides flexibility in depositing funds at regular intervals. A high-pay earner can select it and easily cope with regular payments at the schedule offered by the bank. It encourages regular savings.

    2) Minimum Deposit:

It requires a no big deposit requirement at initial stage as funds are deposited later on at regular intervals. It requires $100 or more as an initial deposit for an add-on CD account opening.

    3) Fixed Interest Rates:

Add-on CDs ensure the fixed rate of returns. Many financial institutions fix the rates and never decline them till their maturity at the time of low interest rates.

Disadvantages:

    1) Early Withdrawal Penalties:

It may be costly to withdraw funds before the maturity date. Each financial institution lays down rules and regulations for the smooth working of Add-on workings. Add-on CD generates inherent illiquidity that may trigger financial disappointment in case of emergency needs.

No-penalty certificate of deposit can prevent you from early withdrawal penalties, but it generates lower interest rates. 

    2) Comparatively Lower Interest Rate:

Comparatively, add-on CDs offer lower interest rates than regular CDs.

    3) Limited  Number of Financial Institutions Issues Add-on CD:

Fewer banks issue add-on CDs. So, it is not easy to find an add-on CD.

Frequently Asked Questions (FAQs)

★ Could You Add Money to A CD Account Regularly?

No, it's not allowed for regular CDs. All funds are deposited one time when opening the account. But, an Add-on CD provides this flexibility and allows to deposit of funds after the initial deposit, at regular intervals. You can set up recurring transfers to the CD account in case of an add-on CD.

★ How Do You Open an Add-on CD Account?

Opening a CD account or an Add-on CD account works the same way. after fulfilling the bank's requirements for account opening, a legally eligible individual can open an add-on CD account.

★ When Does it Make Sense to Open an Add-on CD Account?

Add-on CDs would be the best choice for those individuals who have limited funds at the time of opening a CD account, but later on, could manage to deposits to the account at regular intervals.

★ Can You Have Multiple CD Accounts At Once?

Yes. You should divide your funds over several financial assets. One of the common techniques is spreading your funds over multiple CDs with multiple CD terms which is known as CD Laddering. 

Article Sources: 

1. Investor.gov. "Certificates of Deposit (CDs)., https://www.investor.gov/introduction-investing/investing-basics/investment-products/certificates-deposit-cds"