What Is a CD Ladder? Pros, Cons, Alternatives

A CD ladder is a savings strategy by which you purchase several certificates of deposit (CDs) with staggered maturities (i.e., one-year, two-year, three-year, etc.) to take advantage of higher rates on those with longer terms while preserving access to your funds on a scheduled basis.

As each CD matures, you use the funds to purchase a long-term CD. Eventually, you end up with all long-term CDs maturing at staggered intervals, providing ongoing liquidity and maximum returns.

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CD ladders: How do they work?

A CD ladder divides your investment into multiple CDs (rungs) with different maturity dates, allowing you to earn interest while still having access to some of your funds regularly. After your initial purchase, as each CD matures you replace it with a long-term (i.e., five-year), higher-interest CD. Eventually, these long-term rungs on your CD ladder mature regularly, providing liquidity and maximum return.

Most people put equal amounts into each CD to ensure access to the same funds as each CD matures. You can renew each maturing CD, lower or raise the amount, and change the term length to take advantage of varying rates, or withdraw the money for immediate needs.

How to build a CD ladder

Building a CD ladder is a great way to earn a higher interest rate on your savings while keeping your money safe and accessible.

Here are the steps to building a CD ladder:

• Decide how much money you want to invest in your CD ladder. It can be any amount, but it should be something other than emergency funds, as only some of the money will be available soon.
• Choose the length of time you want your CDs to mature. For example, you may have $5,000 to invest in five $1,000 CDs that mature at six-month intervals.
• Search for the best CD rates. You want to find CDs with the highest interest rates possible, so you can earn the most money. You don’t need to purchase all your CDs from the same bank, especially if you plan to take advantage of the best rates.
• Buy your CDs. At this point your ladder will consist of five $1,000 CDs maturing at six-month intervals:

* Based on rates offered as of Dec. 18, 2024

• Let your CDs mature. As each CD matures, you can withdraw the money or roll it into a new one. If you roll it over, you'll likely want to buy the longest term with the highest interest rate.
• Rinse and repeat. After you have cycled through and rolled over all five initial CDs, you will have five new CDs maturing at your chosen interval. The table below reflects the purchase of a 30-month CD with each rollover. Your second round of CDs will mature at six-month intervals. If you continue buying a new CD every time, you will have access to 20% of your investment every six months.

Benefits to CD ladders

Building and maintaining a CD ladder has several advantages as a savings strategy.

• It has a higher interest rate than most traditional savings accounts.
• It is a safe investment, as it is insured by the Federal Deposit Insurance Corporation (FDIC).
• It provides a steady, predictable income stream, reducing risk by spreading your investments over several CDs (and banks).
• It lets you take advantage of interest rate increases by rolling over CDs on a schedule.
• Typically there are no monthly fees, unlike with savings accounts.

Disadvantages of CD ladders

CD ladders do come with potential drawbacks.

• CD interest rates don’t always keep up with inflation, sometimes providing a negative return.
• Even with a CD ladder, you do not have constant access to all your funds as you might with a money market account or high-yield savings account.
• You may pay a penalty if you cash in a CD before maturity.
• Stocks and other investments generally pay higher returns.

How to get started with your CD ladder

Begin by researching CD rates and terms offered by banks and credit unions. Rates determine how fast your money will grow. Term to maturity is essential because the more offerings there are, the more flexibility you will have in setting up your ladder.

Don’t confine yourself to a single bank or credit union. You can help spread risk around by getting CDs from different financial institutions. Once you’ve determined which CDs to buy, it’s simply a matter of creating the rungs of your ladder by purchasing them according to your preferred staggered maturity schedule.

How to choose the right financial institutions for your CD ladder

Interest rates and terms to maturity are only two of the things you should research when deciding on which banks or credit unions should get your CD business. Make sure minimum deposit requirements fit your plan. Also, take care to understand how early withdrawal penalties work, even if you are sure you will never have to withdraw funds before maturity. And never say never.

Read the fine print regarding fees and the calculation of interest. Understand that some CDs automatically renew and make sure you are ready to act when the maturity date arrives. Although your rate is guaranteed through the maturity date of a given CD, the rate is not guaranteed to be the same for its renewal. A CD ladder is not a “set it and forget it” savings tool. It requires vigilance.

What are the risks associated with CD ladders?

One risk with a CD ladder is the chance you might miss out on a higher interest rate in the middle of a term. You could also miss out on other investments because your money is tied up in CDs.

The risk of having a financial emergency in the middle of a term—even one that’s only six months long—could result in losses due to early withdrawal penalties. It’s always a good idea to consult a trusted financial adviser like WiserAdvisor before investing in a CD ladder, even though it is considered a low-risk strategy.

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Alternative CD ladder structures

Traditional CD ladders, as described above, are not the only ways to employ a ladder structure with savings.

Barbell CD ladder. This type of structure involves investing in a balance of short-term and long-term CDs to provide access to half of your investment and better growth to the other half.

Bullet CD ladder. In this structure you would invest in a series of CDs, bought over time, that all mature on the same date. This is good if you are saving for a specific goal, such as buying a house. As many banks automatically renew CDs, you must be vigilant when using this strategy.

Bump-up CD ladder. This type of CD ladder allows you to take advantage of increasing interest rates over time. Bump-up CDs typically provide for an interest rate increase once during the CD term, though only if the bank raises rates for new CDs.

CD ladder alternative for riskier investments

CD ladder alternatives, especially if you don’t mind taking on a little more risk, include things such as a mix of short-term and long-term bonds. This could result in higher returns but more risk. You could invest in a diversified portfolio of stocks or mutual funds, provided you have the knowledge and skill and are willing to do the research.

What would your perfect CD ladder look like?

A textbook CD ladder would consist of equal value, evenly spaced CDs with increasing interest rates as the date to maturity gets longer. When there is uncertainty in the marketplace and economy, this type of ladder is more difficult to assemble.

Duration

A CD ladder contains multiple CDs with ever-increasing maturity dates based on your liquidity tolerance. If you need frequent access to investment funds, six-month spacing is best. If your needs allow it, one year between maturity dates is a good choice.

Number of CDs

A three-rung CD ladder is the minimum you should aim for. Most people use five CDs—the optimum number—with either six-month or one-year spacings.

TIME Stamp: Use a CD ladder for better returns and more liquidity

A CD ladder is a reasonably safe way to grow savings with higher interest rates than are offered by regular savings accounts. The downside is that higher rates usually require losing access to investment funds. By building a CD ladder, you gain more-frequent liquidity while enjoying better returns than some other savings strategies provide.

Frequently asked questions (FAQs)

Can I customize the length and terms of my CD ladder?

One of the beauties of a CD ladder is that it's highly customizable. You can choose the number of rungs (CDs), maturity dates, and amount invested in each CD.

Typically, longer-term CDs come with higher interest rates, but, of course, they tie up funds longer. In times of market and economic uncertainty, shorter-term CDs may also have higher rates.

What happens when a CD matures in a ladder?

At maturity you can reinvest the funds into a new CD—with, if possible, a higher interest rate. Typically, this means the new CD will have a longer maturity date. You can also withdraw and use the funds, although that means this rung of your CD ladder goes away until and unless you replace it.

Can I withdraw funds from a CD before it matures in a ladder?

You can withdraw funds before maturity, but it is not recommended, because it usually results in a penalty that causes you to lose some of the interest you have earned. In some cases early withdrawal can even result in the loss of some principal.

What are the tax implications of CD ladders?

CDs are after-tax savings vehicles, meaning their earnings are taxable, but their principal is not. There are IRA CDs that offer tax advantages, and they can be constructed as a CD ladder.

Can I add or remove CDs from an existing CD ladder?

Yes, but this can impact the overall ladder structure and should be carefully considered, including consulting with a trusted financial adviser.

Are CD ladder returns guaranteed?

As CDs offer a fixed interest rate, the returns of a CD ladder are guaranteed, assuming you do not make early withdrawals or otherwise interfere with the maturity dates of the individual CDs in the ladder.

What are mini CD ladders?

A mini CD ladder is made up exclusively of shorter-term CDs. It could include three-month, six-month, or nine-month CDs. Interest rates on short-term CDs are usually low. That makes, this earning strategy less effective than the classic CD ladder, as it combines low rates with a short time to maturity.