What is an add-on CD?

Smart savers shop around for a good deal before locking funds into any certificate of deposit. But the more CD shopping you do, the more you discover that it’s not just “one size fits all” out there.

The vast majority of CDs fit a standard formula: you deposit a lump sum, you agree to keep it there for a set term, and the bank agrees to pay you a fixed interest rate on your funds.

But anyone who shops around will quickly notice some specialty CD types, which tweak the general structure with added flexibility or requirements on one aspect of the certificate.

One of the simplest variations is an add-on CD. With these, you still make an initial deposit, and the bank still requires a set term in exchange for a fixed rate. The difference is that these CDs don’t limit you to the initial deposit. You can add more funds over time, without changing your term or the interest rate.

Many add-on CDs allow you to add as many deposits as you like, although they’ll likely require minimum additional increments and may stipulate a maximum that can ultimately be held in the CD. But some add-on certificates specify you can make just one or two additional investments over the CD’s lifetime.

Add-on certificates are well-suited to anyone saving toward a specific goal, like a down payment for a house or car, because they allow you to incrementally sock money away while earning more than you likely would from a savings account.

Just be sure to choose a term length that aligns with your savings goal, and check that the rate is competitive. If you can earn almost as much with a savings or money market account, you may be better served by the withdrawal flexibility those accounts offer.