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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 is a savings strategy that, if executed correctly, gives you the higher yield of a CD with flexibility akin to a savings account. You create a CD ladder by dividing up the amount you want to keep in CDs and putting the portions into individual, smaller CDs with staggered maturity dates.
Is laddering CDs 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.
Why should you put $15000 into a 1 year CD now? ›
In summary, a certificate of deposit gives you steady and safe returns. Investing $15,000 in a CD could lead to substantial gains, regardless of the CD's length. However, make sure you won't need that money while the CD is active because withdrawing early usually incurs hefty penalties.
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.
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 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.
What is the best length for a CD ladder? ›
How long should a CD ladder be? “A three-year or a five-year ladder is probably best,” Roy says, because longer-duration CDs generally offer higher returns than those that tie up your money for a shorter period of time.
How many CDs can you have at one bank? ›
There's no limit on the number of CDs you can have, and it's possible to have multiple CDs at the same bank or different financial institutions. Whether it's appropriate for you to have more than one CD depends on your financial goals and needs.
Which bank has the highest CD rates? ›
Best CD Rates Today
| Institution | Rate (APY) | Early Withdrawal Penalty |
|---|
| Presidential Bank | 5.50% | 6 months of interest |
| Vibrant Credit Union | 5.50% | All earned interest |
| INOVA Federal Credit Union | 5.40% | 3 months of interest |
| T Bank | 5.35% | 1 month of interest |
12 more rows1. 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.
Compare the Best 1-Year CD Rates
| Institution | Rate (APY) | Term |
|---|
| My eBanc | 5.30% | 12 months |
| West Town Bank & Trust | 5.30% | 13 months |
| American 1 Credit Union | 5.25% | 12 months |
| Mountain America Credit Union | 5.25% | 12 months |
11 more rowsA $20,000 initial deposit could yield roughly $4,700, depending on the term
| CD term | APY | Yield on $20,000 |
|---|
| 1-year Sallie Mae CD | 5.25% | $1,050 |
| 2-year Bread Financial CD | 4.60% | $1,903.24 |
| 3-year Quontic CD | 4.40% | $2,757.86 |
| 4-year Bread Financial CD | 4.15% | $3,532.45 |
1 more rowMay 20, 2024
Once you set up a CD, you can't withdraw any money before the maturity date without paying a penalty. With a CD ladder, the next maturity date could be right around the corner so if an emergency comes up, you can get your hands on some cash penalty-free.
Do you pay taxes on CD interest? ›
How Are CDs Taxed? Interest earned on CDs is taxed as ordinary income at your individual federal income tax rate. This rate can range from 10% to 37% depending on your taxable income and filing status.
Are CD ladders taxable? ›
This means that the interest earned on CDs is subject to federal income tax and, depending on your state, may also be subject to state income tax. It's essential to factor in tax implications when planning your CD ladder to ensure accurate projections of after-tax returns.
How long should my CD ladder be? ›
You typically want to aim for five “rungs” of your ladder with CDs having every single term length from one year to five years.
Is it better to have multiple CDs or one CD? ›
Multiple CDs can help you capitalize on interest rate changes if you believe CD rates will change over time. You might put some cash into a higher-rate 6-month CD and the remainder into a 24-month bump-up CD that allows you to take advantage of CD rate increases over time.
Are CDs worth it Dave Ramsey? ›
Ramsey has referred to certificates of deposit as "nothing more than glorified savings accounts with slightly higher interest rates." Ramsey warned that you shouldn't invest in CDs because average rates won't keep pace with inflation and because they aren't a good place to grow your money.
Are 5 year CDs worth it? ›
Most 5-year CDs offer the ability to earn a high APY. Right now you'll find top rates of between 3.75% and 4.35% APY. That's high compared with the current national average on 5-year CDs (1.38%!) as reported by the FDIC. While getting a high APY is important, it's not the only factor to take into account.
