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 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.

How a CD ladder works

To create a CD ladder, invest a sum in CDs with different maturity dates. 

If you had $5,000 in savings, for instance, you might open CDs with maturities of three, six, nine, 12 and 18 months, and put $1,000 in each. 

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.

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, Mich., 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 6-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

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 3.3%.
• $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%.

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). Both cover $250,000 of deposit per depositor, per institution.