CD Ladder: What It Is and How to Build One

Milana Budisavljevic, Preferred Banking Office Manager, First Republic Bank
December 6, 2022

  • A CD ladder is a deposit strategy where savers buy into multiple CDs that mature at different intervals.
  • With a CD ladder, depositors put money into CDs of varying maturities, which means they’ll be able to access their savings at different times as well as take advantage of multiple interest rates.
  • People who aren’t sure they can wait to access funds locked up in a CD may want to consider CD ladders, which allow them to cash out or renew a portion of money sooner from another "rung" of the ladder, a CD with a shorter maturity date.

Certificates of deposit (CDs) can be a sound way to save money and earn interest on money saved. Depending on your financial goals, you can either place the funds in one CD at a time, or you can build what’s called a “CD ladder,” which is a savings strategy that may provide increased returns in long- or short-term periods. 

But you may be asking: What exactly is a CD ladder, and how does it work? Understanding how a CD or a CD ladder can help you save money will help you decide if this savings strategy is a good match for your financial goals.

What is a CD ladder?

A CD ladder is a savings strategy in which you distribute a sum of money across multiple CDs with different maturity dates over a years-long period. This savings strategy can help you grow your wealth and meet your financial goals while taking advantage of multiple CD ladder rates.

How does a CD ladder work?

CD ladders work in rungs: You deposit money in multiple CDs at once, staggering their maturity dates so funds are accessible at chosen intervals. Compared with other financial products such as interest savings accounts, CDs generally have higher interest rates, in exchange for restricted customer access to funds. In general, the longer the CD term is, the higher the interest rate usually is.

With most CDs (liquid CDs are an exception), if you break the agreement to hold the funds until they mature, you’re likely to face early withdrawal penalties. This is why a CD ladder strategy includes depositing at staggered intervals of CD maturity, so all of your money isn't tied up at the same time.

In lieu of placing a lump sum into one CD and losing the ability to withdraw funds for years, a CD ladder strategy works by dividing up the lump sum into multiple short-term CDs or long-term CDs over staggered time intervals. CD ladders may be safe places for savings, as interest rates are locked in for a period of time. CD ladders may also help you maximize your returns.

How to build a CD ladder

Let's walk through an example of how to build a CD ladder to more clearly demonstrate how to execute this strategy.

Say you have a total of $10,000 ready to deposit in a five-year CD. (Note that this is just one example; the amount and time period of the CD will vary depending on your savings goals, how many CDs you’d like to open, and the ideal maturity date for each.)

Step 1: Open separate CDs

In this CD ladder example, a $10,000 deposit might break out like this:

  • $2,000 into a one-year CD
  • $2,000 into a two-year CD
  • $2,000 into a three-year CD
  • $2,000 into a four-year CD
  • $2,000 into a five-year CD

As a depositor, you have the flexibility to put more funds into one CD as opposed to another based on personal preferences.

Here, over the course of a five-year period, you're staggering — or “laddering” — the maturity dates, so you will have access to each $2,000 deposit annually after the CDs are opened. If you go with a CD ladder strategy, you should be documenting the timeline to decide what to do with the funds after they’ve matured (such as renewing the CDs or cashing out).

Step 2: Reinvest at the maturity date or cash out

Once the CDs mature, you’ll have the opportunity to renew the funds in each one into a longer-term CD or move them to a personal account to spend. Renewing some or all of the CDs for a more-distant maturity date can compound interest on what has already been deposited and accrued, placing more money back in your pocket once the CD matures.

Renewing the money in the example above could look like this:

  • Renew $2,000 + one year of interest into a new five-year CD
  • Renew $2,000 + two years of interest into a new five-year CD
  • Renew $2,000 + three years of interest into a new five-year CD
  • Renew $2,000 + four years of interest into a new five-year CD
  • Renew $2,000 + five years of interest into a new five-year CD

Among the benefits of renewing with this rolling CD ladder timeline is the ability to get the most money back with longer-term CD laddering strategies. The flexibility of the CD ladder strategy may make it compatible for various personal financial goals. Try these additional resources to help you through the process of CD comparison and building a CD ladder.

CD laddering: Benefits and limitations

CD laddering has several advantages for account holders looking to maximize savings. But CD laddering may not be the ideal method for every investor. Review the following benefits and limitations of CD laddering.

Benefits of CD laddering

A CD ladder may be right for you depending on your financial goals. CD ladders have several benefits:

  • Increased accessibility:  Each ladder includes "rungs" with both shorter and longer maturity dates so you can access your money faster than if it were in one long-term CD as a lump sum.
  • Interest rate advantages: You’ll generally be able to seek better interest rates with a ladder composed of multiple long-term CDs, without locking all of your funds into one CD.
  • More flexibility: You’re able to choose how to split your deposits, as opposed to when you have a lump sum tied up in a single CD.
  • Reduced penalty risks: Multiple CDs including some with shorter terms means you’ll have access to funds sooner than if you were to invest everything in a longer term CD, decreasing the likelihood you would need to remove immature funds early and incur an early withdrawal penalty.
  • Guaranteed returns protected by Federal Deposit Insurance Corporation (FDIC): When you open a CD at an FDIC-insured bank, the funds are insured up to the FDIC limit of $250,000 per financial institution. A single CD or multiple CDs with high balances that total $250,000 can earn income on a larger principal and still fall within guidelines of FDIC insurance.

Limitations of CD laddering

CD ladders are not for everyone. Here are some potential limitations:

  • Reduces liquidity: Although CD ladders provide more flexibility than a single CD, you still have a fixed period of time during which you don’t have access to funds until the maturity date.
  • Inflation rates: The highest-yielding CDs don't always match inflation. So, it’s possible rising inflation could outpace your CD rate of return.
  • Fluctuating interest rates: Due to economic fluctuations, you may potentially get a lower interest rate at the time of CD renewal.
  • No guarantee for maximization: While CD ladders often provide solid yields, they do not necessarily mean you’ll maximize the potential returns on your money compared with other financial instruments.

If you think a CD ladder is the right option for your financial goals, learning how to build this savings strategy is important.

How to set up a CD ladder

If you want to make a deposit in a CD ladder that allows you to save money and compound interest,  many financial institutions can help you to explore options. Again, every CD ladder — including maturity dates and rates of return — varies depending on each individual's financial circumstance and if they need to readily access funds. Check with your financial institution to learn what their unique terms are.

Your financial institution can help with the process of opening a CD and building a CD ladder. If you’d like to explore the returns you may get with different types of CDs after they mature, a CD Calculator can help prepare you for a productive conversation with your bank.

Consider the following when choosing a financial institution to build a CD ladder with:

  • Make sure you understand the terms, penalties and deposit requirements.
  • Determine if a shorter- or longer-term CD is the right choice for your personal financial needs.
  • Ensure you can make the minimum deposit amount.
  • Compare financial institutions for the most competitive rates for the terms you're considering.

Alternative CD ladder strategies

If you are looking for a way to reap the benefits of building a CD ladder without having to deal with some of the limitations associated with traditional CD laddering, here are two alternatives you can consider.

Mini-CD ladder

A mini-CD ladder is the same concept as a ​​traditional CD ladder but spread over a shorter period. Instead of CDs maturing over several years, they’re condensed into month-long increments.

In a year, for instance, you could build a mini-CD ladder with three-month, six-month, nine-month and one-year CD.

Uneven splits

Instead of depositing the same amount of money into each CD account, you can choose to allocate money in different amounts across a CD ladder. This technique is known as uneven splits.

This could be a good way to take advantage of interest rate fluctuations — when interest rates rise, you can invest more in short-term CDs, and when interest rates drop, you can secure your money in a longer-term CD.

This method also allows you to better structure your CD ladder based on your savings goals. Just keep in mind that this approach requires some awareness of economic changes and interest rate fluctuations.

Are CD ladders a good idea?

CD ladders can be a great investment opportunity for those with the patience and time to dedicate to a long-term savings strategy. While CD laddering does take time, it offers more flexibility by allowing investors access to cash on a relatively consistent basis.

CD laddering will also often offer better returns than a single short-term CD. But keep in mind that there can be some drawbacks, such as losing money to rapidly rising inflation and missing out on the higher return potential with other investment vehicles.

The choice to open a CD ladder will ultimately come down to your financial goals and circumstances. Consider your needs before committing to a CD ladder and take some time to compare your options. There may be a better savings strategy that more closely suits your financial preferences, such as a high-yield savings account or individual retirement account (IRA).

CD ladder FAQ

Learn more about CD ladders by reviewing these frequently asked questions.

Are CD ladders protected?

CDs are insured by the Federal Deposit Insurance Corporation (FDIC) when you open one at an FDIC-insured bank. If you open an account at an insured credit union, the CD will be backed by the National Credit Union Administration (NCUA).

CD ladder vs. bond ladder: What’s the difference?

A bond ladder is another type of fixed-income laddering strategy that consists of buying multiple bonds with different maturity dates and spreading out your investments. After a bond matures, its profits are reinvested into a new, longer-term bond. Bond ladders offer a way to manage risk and preserve capital.

What are the best CD rates?

CD rates are always changing depending on economic conditions and actions taken by the Federal Reserve. You can check online resources for the monthly annual percentage yield (APY) rates being offered on CD accounts.

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