Certificates of deposit (CDs) have been popular savings vehicles for many years because they are safe and pay higher interest rates than other types of savings. Traditionally, once you bought a CD you could not add or withdraw funds until it reached maturity. In recent years that has changed. Banks and credit unions now offer a variety of “flexible” CDs, some of which allow you to add money during the life of the CD.
Certificates of deposit are defined as fixed-rate time deposits. Essentially the bank or credit union pays a guaranteed interest rate in return for the depositor agreeing to leave the money in the CD account for a specified time. Traditional CDs work much like negotiable bonds in that the amount and terms are predetermined and don’t vary. Today many CDs feature the option of adding or withdrawing money before the CD reaches maturity.
An add-on CD is pretty much what it says: The owner can add more money. The additional funds earn the same initial interest rate until the CD matures. Issuers usually require a minimum additional deposit of $500. The interest rates paid by add-on CDs are generally about the same as for traditional certificates of deposit.
Liquid certificates of deposit (also called penalty-free CDs) are a variation of the add-on CD. With a liquid CD you can not only add money to the CD, you may withdraw funds periodically. Providers require advance notice and you must maintain a minimum balance in the CD account. Otherwise, the interest rate will be lowered by as much as one percent. Liquid CDs usually pay a little less than traditional CDs but more than money market accounts.
For many investors add-on and liquid CDs have some real advantages. You get the benefit of good earnings on the funds you add without having to purchase several small CDs (this can mean higher rates as well since large CDs usually pay more). Liquid CDs also offer some protection against being “locked-out” of increases in prevailing interest rates by a long-term CD. You can shift at least part of the funds into other accounts to capture the higher rates.
Add-on and liquid CDs are insured by the FDIC (or the National Credit Union Authority) like regular CDs, so they are just as secure (provided the financial institution is covered by deposit insurance). When shopping for these or any “flexible” CD, read the terms and conditions carefully. Some flexible CDs include additional benefits. For example, “bump-up” CDs give you the opportunity to at one point raise your interest rate if prevailing rates are increasing.
Flexible CDs can have their down side. A variable-rate CD may rise as well as fall, with the bank only guaranteeing a floor rate. Also check whether a CD has a call feature: That would allow the bank to redeem the CD before the maturity date, which it would likely do if prevailing rates drop significantly.
Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.