Exploring Add-on CDs: A Comprehensive Guide

As you navigate the world of investment options, you might come across certificates of deposit (CDs). CDs are a popular choice for those looking to earn a fixed rate of interest by depositing money for a specified period. Among the various types of CDs, the add-on CD stands out for its unique feature of allowing additional deposits during the maturity period. In this blog, we will delve into the details of add-on CDs, their pros and cons, and some alternatives you might consider.

What is an Add-on CD?

An add-on CD is a type of certificate of deposit that permits you to add money to your account before the maturity period ends. This feature makes it somewhat similar to a savings account. Unlike traditional CDs, which typically restrict additional deposits after the initial one, add-on CDs offer more flexibility.

For instance, if you open a 12-month add-on CD with an initial deposit of $500, you can continue to add more money to the account throughout the 12-month period. The additional deposits will also earn interest, making it a more dynamic investment option compared to traditional CDs.

How Add-on CDs Differ from Traditional CDs

While both add-on CDs and traditional CDs offer a fixed interest rate during the maturity period and are generally insured by the Federal Deposit Insurance Corp. (FDIC) or the National Credit Union Administration (NCUA), there are several key differences:

• Additional Deposits: Add-on CDs allow you to add money during the maturity period, whereas traditional CDs do not.
• Interest Rates: Add-on CDs may offer lower interest rates compared to traditional CDs.

Pros and Cons of Add-on CDs

Pros

• Fixed Interest Rate: Like traditional CDs, add-on CDs offer a fixed interest rate, providing a predictable return on your investment.
• Compound Interest: You earn interest on accumulated interest, which can significantly boost your returns over time.
• Flexibility: The ability to add money during the maturity period offers greater flexibility in managing your investments.
• Low Minimum Deposit: Some add-on CDs have a low minimum initial deposit, making them accessible to a broader range of investors.
• Insurance: Add-on CDs are usually insured by the FDIC or NCUA, providing a safety net for your investment.

Cons

• Limited Availability: Add-on CDs are not as widely available as traditional CDs.
• Minimum Initial Deposit: Some institutions may require a higher minimum initial deposit.
• Early Withdrawal Penalties: Like traditional CDs, add-on CDs may impose penalties for early withdrawal.
• Deposit Restrictions: There may be restrictions on the types of deposits allowed, such as cash or check only.
• Account Balance Cap: Some add-on CDs may have a cap on the account balance.

Where Can You Get an Add-on CD?

Add-on CDs are not as commonly available as traditional CDs. However, several financial institutions offer them, including:

• Associated Bank
• Bankers Trust
• Bank5 Connect
• BECU (formerly Boeing Employees’ Credit Union)
• BMO Harris Bank
• Credit Union of Colorado
• East Idaho Credit Union
• FAIRWINDS Credit Union
• First Horizon Bank
• FNCB Bank
• MSU (Michigan State University) Credit Union
• Provident Credit Union
• SAFE Credit Union (formerly Sacramento Air Force Employees Federal Credit Union)
• SECU (State Employees Credit Union of Maryland)
• Towne Bank
• Veridian Credit Union

Alternatives to Add-on CDs

If add-on CDs don’t seem like the right fit for you, there are several alternatives to consider:

High-Yield Savings Account

A high-yield savings account generally offers a higher interest rate than standard savings accounts, providing a good balance between accessibility and returns.

CD Ladder

Creating a CD ladder involves investing in multiple CDs with varying maturity dates. This strategy allows you to access cash from shorter-term CDs while still earning higher interest on longer-term CDs.

CD Barbell

With a CD barbell, you split your investment between one short-term and one long-term CD. This approach lets you meet short-term cash needs while benefiting from higher long-term interest rates.

Dividend-Paying Stocks

Dividend-paying stocks can provide a source of short-term cash and help cushion the impact of market volatility. Companies share profits with stockholders through dividends, making this an attractive option for some investors.

The Bottom Line

Add-on CDs can be an appealing investment option due to their flexibility in allowing additional deposits during the maturity period. However, they are not as widely available and may offer lower interest rates compared to traditional CDs. If you’re considering an add-on CD, it’s essential to weigh the pros and cons and explore other investment options to find the best fit for your financial goals.

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