What Is an Add-On Certificate of Deposit?

Core Concept of an Add-On CD

A Certificate of Deposit (CD) functions as a savings account where money is held for a fixed period, earning a predetermined interest rate. This financial product requires funds to be held until a specific maturity date to avoid penalties. An add-on CD is a variation of this traditional savings vehicle, offering a distinct feature. It allows savers to contribute more to their principal investment over time.

Its primary distinguishing characteristic is the ability to make subsequent deposits after initial funding. This contrasts with a conventional CD, which prohibits additional contributions once funded. It accommodates incremental savings without requiring multiple, separate CDs. This flexibility benefits individuals with periodic income or those building savings gradually. Despite this unique feature, an add-on CD maintains the fundamental structure of a time deposit, with a fixed term and a stable interest rate applied to the growing balance.

Making Additional Deposits

Making additional deposits into an add-on CD involves specific rules set by the financial institution. These rules ensure orderly contributions and allow the account holder to increase their investment over the CD’s term. Common requirements include a minimum amount for each additional deposit, typically ranging from $25 to $100 or more, depending on the provider. These minimums help manage the administrative aspects of processing multiple small transactions.

Financial institutions also impose limits on deposit frequency. Some add-on CDs allow daily or weekly contributions, while others restrict deposits to a monthly basis or a set number of times, such as 5 to 10 deposits over the term. Many add-on CDs also have a maximum total contribution limit, often aligning with deposit insurance limits like $100,000 or $250,000. All subsequent deposits are added to the initial principal, increasing the amount that earns interest throughout the CD’s duration.

Interest and Maturity

Interest on an add-on CD accounts for the fluctuating principal balance from additional deposits. Interest is typically compounded on the current balance, meaning earned interest increases as more funds are added, calculated on a larger sum. The fixed interest rate established at inception applies to this growing principal, ensuring all contributed funds benefit from the agreed-upon yield. This compounding effect allows the investment to grow more significantly than if interest were only calculated on the initial deposit.

When an add-on CD matures, the account holder has several options. A common choice is to roll over the principal and any accrued interest into a new CD. This new CD can be another add-on CD for continued flexible contributions, or a traditional CD, depending on preferences and rates. Alternatively, the account holder can withdraw the entire sum, including initial principal, all additional deposits, and accumulated interest. This withdrawal provides access to the funds for other financial needs or investment opportunities.