What is a CD ladder?

Income-minded investors typically trade interest rates for liquidity — the higher the interest rate, the longer you’ll need to lock up your cash. But a certificate of deposit (CD) ladder can help you have the best of both worlds: higher rates and freer cash.

In a CD ladder, you take a lump sum and divide it up between certificates of deposit (CDs) with different maturities. By doing so, you can capture the best long-term CD rates and still have access to cash in the short term.

What is a CD ladder

A CD is an agreement between you and a financial institution: Typically, you earn a fixed rate of interest over a set period of time on an amount of money you hand over to the bank. 

The goal is to lock in a competitive yield that will allow you to maximize your earnings on cash you don’t need during the term. Banks offer that interest in order to have access to the cash for the period of time you selected. That’s why you usually have to pay a fee in order to access your cash before the term period ends.  

A CD ladder is a grouping of CDs, each maturing at different times. When a rung is completed, you take that capital and purchase another CD at the back of the timeline. 

The amount of CDs and their maturity dates can be whatever you’d like, but the idea is to stagger them, so you can have regular access to your cash if you need it. 

How a CD Ladder Works

Each CD should have a competitive yield and they don’t have to all be from the same institution. 

When each CD in your ladders matures, you can take one of two actions: reinvest the money into another CD or cash out. 

You could reinvest if CD interest rates remain stable or rise. On the other hand, you might choose to cash out if you need the money, or declining interest rates make CDs a less attractive investment.

CD ladders, therefore, are customizable — much like a recipe.

From the amount you invest to the issuing bank to the CD terms, a CD ladder’s ingredients can be fine-tuned to reflect your financial needs. And if your needs change, you can re-tweak your ingredients along the way.

What does a CD ladder do?

Since CDs are covered by FDIC insurance — up to $250,000 per account holder, per bank and account type — a CD ladder is considered a low-risk way to maximize returns on savings you prefer to keep in cash. But that’s not the only way CD ladders can complement your finances.

Reliable income streams

CD ladders offer the best of both worlds for retired or income-minded investors who want to preserve capital but still earn yield. When you hold CDs to maturity, not only do CD ladders protect your original investment, but they also provide a predictable income stream at regular intervals.

For example, if you use CDs with six-month maturity intervals to build your ladder, you’ll have a steady, predictable income when your CDs mature every half year.

You can use our CD calculator to run some numbers. 

Lower reinvestment risk

William Bevins, a certified financial planner (CFP) in Franklin, Tenn., says that investors can also decrease reinvestment risk when spreading investments out over CDs of multiple maturities.

If a CD matures and interest rates have fallen, you can reinvest that cash in a more favorable sector, like equities or bonds. But if interest rates are on the rise, you still win.

“Laddering, by definition, involves reinvesting [cash from] a maturing CD on the far end of the ladder,” Bevins said.

CDs on the far end—longer-term CDs—generally offer the most competitive interest rates available. Here’s our CD rates forecast for 2023.

Guaranteed returns

On top of competitive interest rates, Krisstin Petersmark, a retirement income certified professional (RICP) in Bloomfield Hills, Michigan, says CD ladders help investors lock in a guaranteed return in a safe investment— beyond what a savings or money market account can often provide.

For example, say you have a savings account and a six-month CD, each with a 3.25% annual percentage yield (APY). If the Federal Reserve lowers interest rates three months into your CD term, your savings account rate will likely decrease, but your CD rate will not. In this case, you’ll lock in higher returns with your CD even though your savings account rate changes.

In declining interest rate environments especially, CD ladders with maturities far into the future can help guarantee a higher income — and for a longer period — than a savings or money market account.

Pros and cons of a CD ladder

CD ladder pros

• Target different financial goals. A CD ladder can help you save for short and long-term goals simultaneously, since CDs mature at regular intervals.
• Avoid early withdrawal penalties. With CDs maturing regularly, you lower your risk of triggering an early withdrawal penalty if you need quick access to cash. If you’re particularly worried about having access to cash as quickly as possible, make sure the bottom rung on your ladder has a 28-day term.
• Make the most of interest rate changes. If rates are on the rise, you can reinvest. If rates decline, you can cash out and find higher rates of return elsewhere in the market.
• Capitalize on higher interest rates. With a CD ladder, you can buy CDs of varying maturities to get the best rate for every CD term.

CD ladder cons

• Locking into low rates. In a rising interest rate environment, you could have some long-term CDs earning less than today’s best rates.
• Forgoing better returns. Investing in low-risk CDs could mean earning lower rates of return than you might on riskier investments like stocks.
• Inflation risk. In times of higher inflation, CDs might not yield enough to protect your purchasing power—especially since CD interest is taxable.

How to build a CD ladder

Before you build a CD ladder, you need a plan. You can build your plan by first determining how much you want  to invest and how often you need penalty-free access to your cash.

When you know the answers to those two questions, you can decide how many CDs to use to build your ladder and the CD terms that give you the liquidity you need.

For example, if you want to invest $10,000 and need the option to tap your cash every three months, your CD ladder might look like:

• $2,000 in a 3-month CD at 2.25%.
• $2,000 in a 6-month CD at 3.3%.
• $2,000 in a 9-month CD at 3.45%.
• $2,000 in a 12-month CD at 4.15%.
• $2,000 in an 18-month CD at 4.25%.

However, if you don’t need the cash immediately, you could use a weighted laddering strategy. Here, you’d invest more in the highest-yielding CD terms and less in the lowest-yielding.

• $500 in a 3-month CD at 2.25%.
• $1,000 in a 6-month CD at 3.30%.
• $1,500 in a 9-month CD at 3.45%.
• $2,000 in a 12-month CD at 4.15%.
• $5,000 in an 18-month CD at 4.25%.

Find the best CD rate option

When shopping for CDs, it’s important to compare multiple banks and credit unions to get the best rates. Due to their lower overhead, you’ll usually find higher CD rates at online banks. You’ll also want to compare CD terms, like opening deposit requirements, fees and early withdrawal penalties, as these can vary widely between banks.

Finally, make sure the CD issuer is insured. Banks carry insurance through the Federal Deposit Insurance Corporation (FDIC). Credit unions have insurance through the National Credit Union Administration (NCUA).

CD rates by term

• Best three-month CDs.
• Best six-month CDs.
• Best three-month CDs.
• Best one-year CDs.
• Best two-year CDs.
• Best three-year CDs.
• Best five-year CDs.
• Best 10-year CDs.

CD rates by type

• Best no-penalty CDs.
• Best jumbo CDs.

CD rates by issuer

• Bank of America CDs.
• Capital One 360 CDs.
• Chase CDs.
• Citibank CDs.

Frequently asked questions (FAQs)

Is CD laddering a good idea?

CD laddering can be a beneficial strategy for investors who want higher rates of return without locking all of their cash up in a long-term investment. Since CDs in a ladder mature at regular intervals, you can access cash on a predictable schedule while the rest of your cash continues earning a favorable rate.

How many CDs are in a CD ladder?

A CD ladder has multiple rungs, but it’s possible to build a CD ladder of any “height.” For instance, you could build a ladder using two CDs (a short ladder) or 10 (a tall ladder). Knowing when you need access to cash can help determine the optimal number of CDs to use in your ladder.

Is a CD ladder a good investment?

Whether a CD ladder is a good investment depends on your investment goals. For example, if you have 30 years until retirement and need to grow your nest egg, you’re likely better off with investments known to grow over time, like stocks. However, if you want to preserve capital and earn income, a CD ladder could be a good way to create a safe and steady income stream.

How much money should I put in a CD ladder?

Since you can buy CDs with a wide variety of minimum deposits, you can build a ladder with as little as $100 or as much as millions. The best CD ladders will balance your available cash and investment goals.

What is an example of a CD ladder?

Imagine that you’ve got $3,000. You enroll in a one-year, two-year and  three-year CD with $1,000 in each. That’s your CD ladder.

When the first CD matures, you take the $1,000 from it and get another three-year CD. When the two-year CD matures, you do the same thing. At this point, you’ve got three three-year CDs with one maturing each year, all earning interest.