If you want to maximize what you earn on cash, it often pays to look at certificates of deposit, or CDs.
CDs are federally insured just like checking and savings accounts and often pay much higher interest rates (in 2023, some CD rates reached as high as 6% or more). One drawback: Unlike these other bank accounts, they require you to lock up your money for a set period, usually anywhere from one month to five years or more.
That’s where a CD ladder comes in. This financial strategy involves splitting your savings among several CDs that mature at different times, so you can maximize the interest you earn and also always have access to at least some of your money.
“The ladder is a very simple tool that gives you the maximum amount of flexibility, says Arijit Roy, head of consumer segment and product for U.S. Bank. Read on to find out how to build a CD ladder and make it work for you.
How to find the best CD ladder rates
Because CDs require you to lock up your money for a certain period of time, they typically pay higher interest rates than checking and savings accounts, which allow you to withdraw your money whenever you want.
As of July, for example, the typical savings account paid 0.45%, according to the FDIC, while average CD rates ranged from 0.23% to 1.43%. Online banks and credit unions often offer even higher rates.
Generally speaking, rates vary depending on the length of the CD and how much you deposit.“Typically the more money you’re able to invest and the longer the term, the better the rate you’re going to get,” says Shannon Skopak, assistant vice president at Affinity Federal Credit Union.
While some big national banks have begun to offer competitive CD rates, it also pays to look at online banks, as well as local community banks and credit unions. CDs are generally offered in increments ranging from a few months (some institutions offer CDs with terms as short as 30 days, but the returns on those are generally negligible) to five years or more.
Banks often have promotional CD rates, as well. These APYs might be eye-catching, but they don’t lend themselves as well to laddering because they’re often in oddball increments, like 11 months instead of a year, for example.
How to set up a CD Ladder
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. The process then entails rolling those funds into new CDs when their respective terms end—allowing you to take advantage of potentially higher interest rates each time.
For a basic CD ladder example, say you have $15,000 you want to put into CDs. Instead of a single CD, you could build a ladder with three different CDs:
- $5,000 in a 3-month CD
- $5,000 in a 6-month CD
- $5,000 in a 1-year CD
When that first three-month CD matures, you would roll it into a six-month CD. That new CD would reach maturity at the nine-month mark of your initial ladder construction, giving you a scenario in which you would have access to $5,000 within three months at any given point.
How much money do you need for a CD ladder?
While some banks have minimum deposits for CDs of $1,000 or even higher, many set the bar lower, or have no minimum at all. This makes it possible to build a CD ladder with even a modest amount of money, says Skopak. If you aim for a five-year ladder structure and use CDs with a minimum deposit of $500, you could build a ladder for as little as $2,500, she points out.
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. If you anticipate needing the funds in less than three years, a high-yield savings account might offer a similar interest rate without the limitations of a CD.
Most CDs have penalties if you withdraw funds before the account reaches its maturity date—typically anywhere from 30 days to a full year’s worth of interest, depending on the term. (If you don’t want to risk it, look for a no-penalty CD; but take note: They come with lower interest rates than traditional CD accounts).
What are the benefits of CD laddering?
The primary benefit of laddering is that you will always be able to access some portion of your savings within a fairly short time frame. While not a substitute for an emergency fund, a CD ladder can effectively augment one. If the first CD in your ladder matures in three months, you can keep just enough money in a regular savings account to cover potential expenses during those three months and invest the rest of your money in a ladder of CDs that offer much more attractive interest rates.
In a rising interest rate environment, laddering CDs can also help make sure you capture as much potential upside as possible if rates continue to climb. If you locked $10,000 into a three-year CD in 2021 or 2020, you’d probably be kicking yourself now. But if you split that total into $2,000 blocks with staggered maturity dates, you would continually have the chance to reinvest at least part of your savings for a better return as the Fed ratcheted up interest rates to fight inflation.
Laddering also lets you benefit from the higher yields offered by longer-duration CDs. Once you have a ladder established with maturity dates at regular intervals, each new CD you buy will have a term that corresponds to the farthest date of your ladder—allowing you to earn extra interest while also keeping at least a portion of your money close at hand.
How many CDs can you have at one bank?
There’s no limit to how many CD accounts you can have at one bank, but FDIC insurance typically only extends to $250,000 in deposits at a single institution. If you plan to have more than that in CDs, you’ll want to spread your accounts across several banks to ensure your funds are fully protected.
What are some alternatives to a CD ladder strategy?
Experts say you can use the same laddering technique for other types of financial products, as well. “Any low-risk, fixed-income instrument works well in a ladder. It could be a CD, a Treasury, an investment-grade corporate or municipal bond,” says Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.
Short term Treasurys
Like CDs, short-term Treasurys are also sensitive to Fed rate-setting activities, and Treasurys also have marginally more favorable tax treatment: Although earnings are taxed federally at ordinary income rates, interest on deposit accounts (including CDs) and corporate bond yields are taxed at the state and local level, as well.
No-penalty CDs
One of the biggest drawbacks of CDs is that most of them impose penalties if you withdraw funds before the maturity date, or the end of the CD term. Some banks offer no-penalty CDs, but those tend to have lower rates of return.
Brokered CDs
Brokered CDs offer another avenue for earning returns that are higher than conventional CDs without risking loss to your principal. These are bought through brokerage accounts (where you also trade stocks and bonds) and they allow you to have CDs with several banks and credit unions at once. This can help ensure your accounts are all FDIC-insured (since the limit is $250,000 per institution).
Brokered CDs can also be sold before their maturity, and there’s no early withdrawal penalty to worry about should you need cash. They are, however, callable—meaning the bank can pull out of the CD at any time.
Savings Accounts
If you don’t want your money inaccessible for any period or you don’t have the bandwidth to stay on top of your CD rollover dates, the good news is that savings account rates have also climbed as the Fed hiked rates. While CDs offer higher APYs, it is possible to find savings accounts at many online banks (and even some brick-and-mortar banks) that offer returns of 4% or higher.
But people who have the time and the money can benefit from a risk-free savings strategy that earns a higher return over time, Skopak says. “The nice part about laddering CDs is you’re getting a higher rate for your savings, but you’re still able to maintain that liquidity.”
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Meet the contributor
Martha C. White
Martha C. White is a contributor to Buy Side from WSJ.
