A certificate of deposit (CD) is a timed savings agreement between you and your bank. You deposit money up front, and in return, the bank pays you an agreed-upon interest rate. The longer you commit your money, the better CD rates you’ll get.

Most traditional CDs don’t allow you to add funds after your initial deposit — you’re locked in until the account matures. But add-on CDs offer the flexibility to grow your savings account by allowing additional deposits throughout the term.

Read on to learn how you can add money to a CD account to maximize your savings.

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What’s an add-on CD?

Instead of limiting you to a single up-front deposit, add-on CDs allow you to regularly add to your certificate of deposit accounts after you open them. Often, add-on CDs require a lower initial deposit than traditional CDs, making them more accessible if you don’t have a large sum to deposit right away.

It’s important to note that banks may set limits on these accounts. For instance, they could restrict the number of extra deposits or put caps on total account balances.

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How do add-on CDs work?

When you open an add-on CD, you choose a term length, make an initial deposit, and lock in a fixed interest rate for all contributions. Each deposit becomes part of your principal balance and earns the same rate as your first deposit.

For example, assume you open a two-year add-on CD at 3% APY and deposit $2,500 to start. If you add $500 monthly to your CD, your principal would grow to $15,000 and generate about $500 in interest.

The FDIC and NCUA both insure up to $250,000 per person, per institution, covering both your initial deposit and any interest you earn, so your money is safe even if your financial institution fails.

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Three benefits of an add-on CD

Add-on CDs are more flexible than traditional options, which can make saving easier. Here’s why these accounts could be right for you:

1. Banks require low initial deposits: An add-on CD requires less up-front money than regular CDs. First-time savers may find this lower entry point more attractive than CDs with higher initial deposit requirements.
2. Money can be added after account opening: The main benefit of add-on accounts is you can add money to your account any time after the initial payment. Many banks let you set up automatic transfers that align with your paycheck schedule, creating a well-laid-out way to save.
3. Additional deposits earn fixed interest rates: Your add-on CD keeps the interest rate the same from start to maturity. This rate applies to your original principal and any money you add later. You'll know what you'll earn, which helps you plan your finances since market changes won't affect your gains.

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Four disadvantages of add-on CDs

While add-on CDs give you flexibility with deposits, they also have several drawbacks to consider:

1. Banks won’t offer rate increases: Your original deposit's fixed rate stays the same for any additional deposits. So if market rates increase during your term, you could miss out on better earnings.
2. Traditional CDs might offer a higher rate: If you want to maximize your returns, standard or high-yield CDs may be a better option.
3. Early withdrawal penalties still apply: Withdrawing money before the CD matures could cost you several months of interest. These rules apply to your initial deposit and any additional contributions you make during the term.
4. These CDs aren’t easy to find: Banks that offer add-on CDs are rare, as most major institutions focus on traditional CD products. Regional banks or credit unions may be more likely to have these specialized accounts.

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Are add-on CDs worth it?

Add-on CDs can be perfect for people who save gradually or have irregular income streams. You'll get the most value when you build up more money over time but want to start earning interest immediately. Locking in higher interest rates with an add-on CD could also work in your favor, especially if rates decline.

The downside to add-on CDs is that you'll earn lower interest rates than traditional CDs. But you can compensate for this difference by growing your balance throughout the term.

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Annuities vs. CDs

Annuities and CDs both help you grow your savings but serve different purposes. A CD may be a good option if you’re searching for a guaranteed return and minimal risk. But an annuity could be wiser if you’re thinking long-term and want tax advantages with a steady income. Here are a few differences between the two savings strategies.

Term length

CD: Accounts typically mature within a few months to five years, making CDs an excellent choice for short to medium-term goals. If you want to keep funds committed for longer, you can also set up CD ladders and roll funds into new accounts once old ones expire.

Annuities: Most annuity types are designed for long-term growth. Often, you’ll contribute over several years in exchange for steady payments in the future.

Taxes and fees

CDs: You’ll pay taxes on the interest each year, and if you withdraw funds early, you’ll likely be subject to penalties.

Annuities: These accounts usually offer tax-deferred growth, so you won’t pay taxes until you withdraw funds.

Payout options

CDs: When your CD is about to mature, your bank will notify you and give you three choices — roll the funds into a new CD, transfer the money to another account, or withdraw your initial deposit and any earned interest.

Annuities: Annuities offer more flexibility when it comes to payout schedules. You can withdraw funds monthly, quarterly, annually, or all at once, depending on your needs. And some accounts offer payouts for life, which is a secure way to guarantee income for your future.

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This communication is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice.