What is an add-on CD?

A supplemental certificate of deposit or supplemental CD can be a great way to build your savings over time without taking on any risk. These specialty CDs can also give you more flexibility than traditional CDs.

To find out if an add-on CD is right for you, here’s everything you need to consider.

What is an add-on CD?

A complementary CD is a type of certificate of deposit offered by banks and credit unions to store your savings.

Generally, traditional CDs do not allow you to add more money to the account after your initial deposit. At the end of the term, you will receive your initial deposit plus accrued interest. Complementary CDs, on the other hand, allow you to make multiple deposits during the term of the certificate. The number of deposits you are allowed to make varies by CD. But you will have the ability to add to your initial balance to some extent.

Just like a traditional CD, you will be able to lock in a specific interest rate for the duration of the complementary CD. You will be able to keep this interest rate even if you add additional funds to the account.

How Companion CDs Work

When you open an add-on CD, the initial process will be very similar to opening a traditional CD: you will deposit an amount of money onto the CD with the promise of a fixed interest rate for a set period of time .

However, after making an initial deposit on a complementary CD, you will have more options than if you had placed your money on a traditional CD.

Can you add money to a CD before it matures?

You cannot add money to a traditional CD before it matures, but you can add money to a complementary CD before it matures. This feature could be a boon for savers who only have a few hundred dollars to spend.

“Not everyone has the size [sum] available to invest in a CD,” says Molly Ford-Coates, a Georgia-based licensed financial advisor. “The add-on option allows you to add more money as it becomes available.”

However, it is important to note that there may be certain restrictions on how you can add the additional funds. The financial institution may limit the total amount of cash you can add as well as the frequency of deposits. It is also possible that you can only make deposits from certain accounts.

Deposits will be able to grow at the same fixed rate as your initial deposit, which is good news if interest rates drop. However, the downside is that you’d also be locked into your original rate if interest rates go up, according to Ford-Coates.

Advantages and Disadvantages of Complementary CDs

Like all financial products, a complementary CD has advantages and disadvantages. Here are some important points to consider about expansion CDs.

Benefits of an add-on CD

Here are the benefits:

  • The interest rate is fixed: A complementary CD offers the possibility of locking in a fixed interest rate. If market rates for CDs were to drop, you are guaranteed to earn interest at the pre-determined rate for the term.
  • The initial deposit required can be low: You might only need a few hundred dollars to open an add-on CD, whereas a traditional CD might require $1,000 or more.
  • You can deposit money continuously: Unlike a traditional CD, you can add money to a top-up CD before the CD matures. If you don’t have a large deposit to make in advance, you can deposit money continuously. This added functionality of the CD could make it useful as part of a long-term savings strategy.

Disadvantages of an add-on CD

These are the cons:

  • Your money is locked in at a fixed rate: As with most CDs, you don’t have access to your money for a set period of time, which can range from a few months to a few years. If CD rates go up over the term, you could be stuck with a lower rate.
  • Traditional CDs may offer a higher rate: The flexibility of the add-on CD comes with a tradeoff. Expansion CDs generally have lower performance than traditional CDs. “There’s going to be a cost to you having the luxury of being able to add more money to that CD,” says Mike Schenk, chief economist at the Credit Union National Association (CUNA).
  • There are penalties for early withdrawal: Generally, the longer the CD term you choose, the higher the interest rate you will receive. While that makes a long-term add-on CD attractive, it comes at a price. If you need to open your CD before it matures, you will usually be forced to pay an early withdrawal penalty. With that in mind, it’s important to read the fine print of an add-on CD before taking the plunge.

Where to open an add-on CD

Not all financial institutions that offer traditional CDs offer add-on CDs. A few banks that offer complementary CDs are First Horizon Bank and Bank 5 Connect.

Before opening an add-on CD, you should compare CD rates with several financial institutions and consider market rates as a whole.

“In fgeneral, [CDs are] the type of investment you would be most interested in when rates are high,” Schenk says. This is because if you lock in a long-term CD when market rates are low, you may miss out on yield when rates start to rise.

In addition to comparing rates, read the fine print to make sure you’re comfortable with the terms. After all, the funds will be locked to this CD for a fixed period of time. If you expect to need the funds before the maturity date, consider other savings options, such as a high-yield savings account.

At the end of the line

Once you’ve put some money aside, an extra CD can be a handy place to store other funds. Not only will your initial savings increase, but you can increase your savings along the way. Once the CD matures, you might consider renewing it or choosing another investment account to continue growing your savings.

However, it is important to ensure that you will not need to touch your savings for the duration of the CD. It’s a good idea to have a separate emergency fund to avoid having to withdraw funds from your CD sooner.

Check out our CD Calculator to see exactly how much you can earn by storing your savings on a CD.

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Jack L. Goldstein