How Do Add-On Certificates of Deposit Work?

Guest blog post by Anna Helhoski, NerdWallet

Being able to add more money to a certificate of deposit (CD) during its term provides the kind of high flexibility you look for in a high-interest account. With traditional CDs, the amount you invest is fixed from the start, along with the term of the deposit.

An add-on CD account can be especially helpful if you have a savings goal in mind but don’t have a huge chunk of change to put in a traditional CD. Before you get too excited, there are a few tradeoffs that come with this type of account.

Typical CDs yield higher interest rates than basic savings accounts. Usually returns will be higher as the terms of the CD gets longer. The catch is that your money is kept on hold for the duration of the investment, often from six months to several years. During this time, if you try to withdraw early, you’ll face a penalty fee, usually a portion of the interest earnings, depending on the original CD term.

Withdrawal penalties

This is a big downside for those who may need to use some of that money, since taking out part of what you invest may cost you some or all of the interest you’ve earned. Among the upsides of this type in investment are that the return is virtually guaranteed, and the principal of up to $250,000 is insured against loss, if the bank is a member of the Federal Deposit Insurance Corp.

When you choose to open an add-on CD account, all you need is $100 at some institutions. You can add as little as $10 at a time to that amount during the term, just like you would with a savings account. The big difference here, since it’s still a CD, is that you’re adding to a principal that will earn a much higher interest rate than a savings account would, so the amount you’ll earn will be higher.

However, depending on your bank, your interest rate may be lower for an add-on CD than a traditional CD. Not all banks impose that sort of rate reduction.

When considering investing in any CD, here are some elements to evaluate:

  • Minimum deposit to open
  • Annual percentage yield (APY) of return for the CD
  • Automatic renewal, where the principal is invested in a new CD
  • Penalty for early withdrawal
  • How often you can add to the CD and any minimum amount per deposit
  • Automatic transfers and account links

You don’t need a large amount of money to invest in a CD, and an add-on certificates of deposit can be a good way to earn a relatively high interest on your savings, if you have the flexibility to forgo spending any of the money you invest during the term of the CD. The chance to add to the principal without sacrificing yield can help you get the most bang for your buck over time.

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