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Key takeaways
- A CD ladder is a savings strategy that allows you to take advantage of CDs' higher interest rates with more liquidity.
- Your CD ladder can have as many "rungs" (aka different CD accounts) as makes sense for you.
- A CD ladder is a flexible option whether you're saving for a short- or long-term goal.
Want to save for the future, take advantage of higher interest rates and keep some of your money liquid? A CD ladder may be the right strategy for you. To create one, you put your money into certificates of deposits (CDs) of varying term lengths to make the most of interest rates and liquidity. Learn more about how CD ladders work and why you might want to build one.
How does a CD ladder work?
To understand how a CD ladder works, you need to know how CDs work. When you open a CD account, you deposit money into it and agree to leave it alone for a set term, usually anywhere from a few months to several years. Since you can't take money out of a CD account before the term ends without paying an early withdrawal penalty, CDs typically offer higher interest rates than savings accounts or money market accounts. Usually, the longer the CD's term, the higher the interest.
When you build a CD ladder, you open several CD accounts with staggered maturity dates. For example, you may open five CD accounts with the following terms:
- 12 months/1 year
- 24 months/2 year
- 36 months/3 year
- 48 months/4 year
- 60 months/5 year
The interest rates on the CDs vary by term. Say the 12-month CD account pays 3.5% interest, and the 60-month account CD pays 4.5% interest. The remaining three pay rates will likely be between 3.5% and 4.5%.
When the first CD account matures after one year, you reinvest the money into a new 60-month CD account. The next year, when the 24-month one is due, you'll reinvest that into another new 60-month CD. With this laddering method with this example, you'll eventually end up with five 60-month CDs that are continuously coming to term one per year. You've "laddered up" to the longest CD terms and rates while maintaining some liquidity by having annual access to the full balance of one of the account "rungs."
Using a CD ladder lets you take advantage of potentially higher interest rates without the risk of locking up all of your savings for several years in longer-term CDs.
How do you build a CD ladder?
The first step when building a CD ladder strategy is deciding how much you want to invest in it and for how long. Look at your current savings, your budget and your financial goals to determine the size of your ladder.
Say you have $20,000 saved already and want to buy a vacation home in about 10 years, meaning you want that money to keep working for you for at least a decade. You can build a CD ladder to do that:
1. Divide your savings into equal amounts
If you're building a five-rung CD ladder with $20,000, you'll fund each CD account with $4,000.
2. Shop around
Shop around for the best CD rates and annual percentage yield (APY) based on the term. Keep in mind that you don't have to open each CD account at the same institution. You may find a better rate at one bank on a 12-month CD account and a better rate at another on a 60-month CD account.
3. Open and fund the CDs
Open your CD accounts and transfer the money into them.
4. Renew the CDs
Renew each CD account when it matures but pay attention to the term. When the first CD account matures after 12 months, renew it for a 60-month term so it moves to the top of your ladder. When the 24-month CD account matures, renew it for a 60-month term and so on.
Here's an example of a CD ladder:
| CD Number and Amount | Term | Interest Rate | Bank |
| 1. $4,000 | 12 months | 3.5% | Bank A |
| 2. $4,000 | 24 months | 3.75% | Bank A |
| 3. $4,000 | 36 months | 4.25% | Bank B |
| 4. $4,000 | 48 months | 4.25% | Bank B |
| 5. $4,000 | 60 months | 4.50% | Bank A |
Advantages of CD ladders
If you already have a sizable amount of cash saved up, building a CD ladder has several benefits.
Locks in fixed interest rates
With a typical savings or money market account, interest rates can rise or fall, and it's hard to predict what might happen. With a CD account, the interest rate is fixed for the entire term, so you know you'll be getting a set rate of return from day one until the end.
Gives you regular access to your cash
As each CD account renews, you can decide to renew it or withdraw the money and use it as you see fit. You can also choose shorter CD terms, such as six months, if you're concerned about needing your cash sooner rather than later.
Offers flexibility
You can choose your CD ladder size, duration and term lengths. You may decide to build a CD step stool with just two or three rungs or build a ladder with CD accounts that renew at six-month intervals rather than 12-month intervals. How much you put into each new CD account is up to you as well.
Has no annual fees
Unless you withdraw the money before the term is up, CD accounts typically don't charge any fees.
FDIC-insured
CD accounts areinsured by the Federal Deposit Insurance Corporation, so you don't have to worry about your savings losing value.
Drawbacks of CD ladders
CD ladders aren't always the right choice, and the drawbacks could outweigh the benefits.
Interest rates may not be high
The interest rate a CD account offers may be higher than that of a savings account but may not match the potential for return on the stock market.
You lose some access to your money
Even if you choose CD accounts with short terms, such as six months or one year, you'll still need to leave your money alone during that time or risk paying an early withdrawal penalty.
You have to stay on top of the ladder
CD ladders are mostly set-it-and-forget-it, except when the different maturity dates roll around. You'll need to pay attention to those dates and decide what to do next.
CD ladder FAQs
What is a mini CD ladder?
A mini CD ladder uses shorter-term CD accounts, such as three-month, six-month, nine-month and 12-month CDs, rather than one year or longer. It can be a useful strategy if you know you'll need to use your savings soon.
Can you build a CD ladder in a Roth IRA?
Yes, you can build a CD ladder in your Roth individual retirement account. Doing so may be particularly useful if you're approaching retirement age and want a more secure investment option.
Is a CD ladder better than a bond ladder?
It all depends on you. A bond ladder is similar to a CD ladder but uses bonds instead, which typically have longer terms. Bonds also aren't as secure as CDs, and the return isn't guaranteed. That said, the potential return can be higher with bonds than with CDs.
What happens when a CD matures in a ladder?
The answer depends on you. You can cash out the CD account at maturity or renew it.
What are the tax implications of a CD ladder?
You'll need to pay income tax on the interest your CD accounts earn when that interest gets credited to the account, usually at maturity.
Taking advantage of CD ladders
With a CD ladder, your money can earn a decent return while remaining somewhat liquid. Whether you're setting cash aside for ashort-term or long-term goal, a CD ladder can give your savings a boost.
Interested in certificates of deposit? Learn more about ourCD terms and rates.
