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Key takeaways
- A CD ladder consists of opening several CDs with different maturity dates.
- A CD ladder’s benefit is you can earn high rates and also have access to portions of your money at frequent intervals.
- With a ladder, you can decide how much money to deposit in each CD and whether to reinvest in a new CD when each CD matures.
A CD ladder is a savings strategy where you invest in several certificates of deposit (CDs) with staggered maturities. Although CD rates are currently higher for shorter-term CDs, setting up a CD ladder would allow you to get those high rates for the short term, while also taking advantage of some longer-term stability to withstand market fluctuations.
With this strategy, you’ll redeem funds more often than if you put all of your savings in a long-term CD, while still reaping some long-term, predictable benefits.
How to build a CD ladder
Here’s an example of how to set up a CD ladder. Let’s say you want to build a five-year CD ladder with five rungs. If you have $2,500 to invest, then you might divide the funds equally into five CDs with different maturity dates. Here’s how you could set it up:
1. Open the CDs. You’ll open five CDs with terms ranging from one year to five years as follows:
- $500 into a one-year CD
- $500 into a two-year CD
- $500 into a three-year CD
- $500 into a four-year CD
- $500 into a five-year CD
2. Reinvest the money when the CDs mature.
When the first CD matures after a year, you can continue to build your ladder by reinvesting the funds in a new CD. Then, when the two-year CD matures, use the proceeds from that account to open a new CD. Continue the process each year for as long as you want to maintain the CD ladder. You can also choose to cash out the CDs and use the money for other purposes, depending on your financial needs and goals.
The CDs don’t have to hold the same amount of money, so you may opt to open each one with varying balances to accumulate a higher yield. For example, you might want to invest more in shorter-term CDs while their rates are high. Just remember that there’s usually an early withdrawal penalty for taking out the funds before the CD’s maturity date.
As you build your CD ladder, there’s no obligation to open all of your CDs at the same bank or credit union. In fact, it’s a good idea to shop for the best CD rates for each term.
Alternative CD ladder structures
There are several ways to modify a traditional CD ladder strategy based on your goals:
- Mini CD ladder: Creating a CD ladder with only shorter-term CDs could be an option for savers who don’t wish to invest in longer-term ones. For instance, such a ladder could consist of terms of six, nine, 12 and 18 months.
- Barbell CD ladder: A barbell CD strategy is similar to a traditional CD ladder, but the middle rungs are missing. As such, short-term CDs make up one end of the structure, while long-term CDs comprise the other end. A potential benefit of this is you could have access to some of your funds sooner, while taking advantage of longer terms with higher rates.
- Bullet CD ladder: A bullet CD strategy consists of opening several CDs over time, of varying term lengths, that will all mature at once. An example would be opening a five-year CD now, a four-year CD in a year and a three-year CD in two years. This can come in handy when you’re planning for a large expense. You won’t have to come up with all of the funds at once, giving you time to save more money to commit to additional CDs.
Benefits of a CD ladder
- CDs offer a guaranteed rate of return.
- You can take advantage of higher rates on shorter-term CDs while having some funds earn predictable rates for longer terms.
- If rates rise, you can reinvest the money from shorter-term CDs into new accounts to lock in higher APYs.
- Keeping some funds in shorter-term CDs ensures that your money is more accessible than if it were all kept in a long-term CD.
Drawbacks of a CD ladder
- You could be missing out on higher returns from more aggressive investments, such as stocks or bonds.
- If interest rates decline, you might be reinvesting the money from a matured CD into lower rates.
- If you end up investing too much in longer-term CDs, you may find yourself having to withdraw money before the maturity date and get hit with a penalty fee.
Are CD ladders good investments?
A CD ladder can help you build a predictable investment return. It also provides the potential to earn better returns than you would with a single CD and the ability to access a portion of your savings each time a CD matures.
While there’s no risk of losing any of your money in an FDIC-insured CD, you could potentially miss out on the opportunity to earn a better rate if you reinvest shorter-term CDs when rates decline. Plus, you’ll potentially lose out on better returns offered by other investment vehicles with greater growth potential.
Consider your reason for opening a CD ladder before committing to one. It could be a great fit for your short-term savings goals, but a long-term savings effort might require an additional boost from other investment vehicles.
– Bankrate’s Karen Bennett updated this article.
FAQs
A CD ladder consists of opening several CDs with different maturity dates. A CD ladder's benefit is you can earn high rates and also have access to portions of your money at frequent intervals. With a ladder, you can decide how much money to deposit in each CD and whether to reinvest in a new CD when each CD matures.
Is CD laddering a good idea? ›
Certificate of deposit (CD) ladders are a great strategy for individuals looking for a secure, fixed-rate investment to build over time. It is ideal for longer-term savings because you'll be penalized for any early withdrawals.
What is the best way to build a CD ladder? ›
Build your CD ladder. Once you've determined how much you want to save and how many CDs you want to open, open your CDs, staggering the CD terms so that your money will mature at different dates on a rolling basis (every year, every six months… whatever you choose). Continue laddering.
What is the ladder method for CD? ›
A CD ladder is a savings strategy to spread a lump sum of cash across multiple certificates of deposit to take advantage of higher rates — usually in long-term CDs — while freeing up portions of that money at short-term intervals. CDs tend to have the highest interest rates among savings accounts.
Why should you put $20,000 into a 3 year CD right now? ›
Your principal is secure
If you put $20,000 into a 3-year CD with an interest rate of 4.85%, you'd earn a total of $3,053.42 in interest at the end of the three years. And, your principal — which is the initial $20,000 you deposit — will be safe.
Why should you put $15000 into a 1 year CD? ›
Earnings are predictable
Here's an example of the interest you could earn for each CD term listed above with a $15,000 deposit: - 6-month CD at 5.55%: You'd earn $410.63 in interest, making the total value $15,410.63. - 1-year CD at 5.67%: You'd earn $850.50 in interest, making the total value $15,850.50.
What is the biggest negative of putting your money in a CD? ›
Early withdrawal penalty
One major drawback of a CD is that account holders can't easily access their money if an unanticipated need arises. They typically have to pay a penalty for early withdrawals, which can eat up interest and can even result in the loss of principal.
Why are CDs not a good investment? ›
Additionally, CDs might not be worth it if you need more access to your savings, since there's typically a penalty for withdrawing the money early. For example, if you're building an emergency fund, avoid keeping that fund in a CD.
Should I lock in a CD now or wait? ›
How CDs work. Unlike traditional or high-yield savings accounts, which have variable APYs, most CDs lock your money into a fixed interest rate the day you open the account. That's why if you suspect that interest rates will soon drop, it can be a good idea to put money in a CD to preserve the high APY you would earn.
How much money do I need to start a CD ladder? ›
An important part to note about CD ladders is that you have to meet the minimum deposit requirement for each account you open. Banks typically require a minimum deposit of $500 or higher to open a CD account. Some minimum requirements can reach as high as $10,000 while other banks don't require a minimum at all.
If you're a long way out from retirement, a CD probably isn't your best savings option. Retirement accounts like 401(k)s and IRAs offer tax advantages and potentially higher returns in the long run. Early withdrawal penalties can minimize returns.
Do you pay taxes on CD interest? ›
CD interest is subject to ordinary income tax, like other money that you earn. The IRS requires investors to pay taxes on CD interest income. The bank or financial institution that holds the CD is required to send you a Form 1099-INT by January 31.
How does a CD ladder work for dummies? ›
Members who prefer low-risk savings options tend to love CDs for their predictable returns. CD laddering is a strategy that can give you quicker access to your funds. Instead of locking your money away in one CD for, say, five years, you divide that money into multiple CDs, each with a slightly shorter term.
Is it better to have one CD or multiple? ›
If your goals have different timelines, multiple CDs with different maturity terms could help you create an effective savings strategy. This allows flexibility in saving money for short- and long-term goals.
What is the 3 to 1 ladder rule? ›
Most ladder injuries occur when getting on or off a ladder. To use ladders safely, always maintain three points of contact. That means two hands and one foot or two feet and one hand on the ladder at all times.
How much money do you need for a CD ladder? ›
And while your ladder can have as many "rungs" or different CDs as you want, it usually makes sense to have at least three to five to diversify your holdings and benefit the most from this strategy. Theoretically, you could do this with $50 or even $100.
How does a CD work in simple terms? ›
A certificate of deposit (CD) is a type of savings account that pays a fixed interest rate on money held for an agreed-upon period of time. CD rates are usually higher than savings accounts, but you lose withdrawal flexibility. If you withdraw your CD funds early, you'll be charged a penalty.
Do I have to pay taxes on CD interest? ›
CD interest is subject to ordinary income tax, like other money that you earn. The IRS requires investors to pay taxes on CD interest income. The bank or financial institution that holds the CD is required to send you a Form 1099-INT by January 31.
