Banking

CD Laddering: The Ultimate Guide

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Clever savers sometimes structure their certificates of deposit (CDs) as a CD ladder to lock in higher rates while keeping their money more accessible. CDs are timed deposits whose interest rates are guaranteed until they mature — however, you can receive a penalty for withdrawing early.

CD laddering divides your deposits into several smaller CDs, so you can access your funds more frequently. This strategy offers more flexibility than a single, standard CD.

Read on to learn more about how to create a CD ladder, the positives and negatives of them and potential alternatives for your savings.

What is a CD laddering strategy?

CD laddering is a strategy that staggers the maturity dates of multiple CDs, ensuring consistent returns on a quicker timeline.

Suppose you put your money in five CDs of different lengths instead of one 5-year CD. You could then withdraw some of your funds multiple times over the course of five years without penalty instead of waiting the full five years to withdraw your entire deposit.

CDs are deposit accounts that sacrifice liquidity for higher annual percentage yields (APYs) than traditional savings accounts. If you know you won’t need to access your funds in the short term, you can choose to lock away a portion of your savings in a CD. Unlike other deposit accounts or many investments, CDs guarantee a specific yield, so you won’t need to concern yourself with how future rates may rise and fall.

To get the best possible returns on your CD ladder, find the highest APYs on CDs. MagnifyMoney regularly updates our list of the top CD rates for various terms.

Creating a CD ladder

Instead of opening a single CD, open several CDs. Each CD should have a fraction of your deposit with a different term. For example, you could open five CDs with terms ranging from one to five years.

Once each CD matures, it should be renewed at the longest term of the ladder — in this example, that’s five years. This means a fifth of your initial deposit (plus interest earned on the balance) would be available for withdrawal each year.

You can open CDs in your CD ladder at different financial banks or credit unions to chase the best rates for each term, or open them all at a single institution for simplicity and convenience. Many brokerage firms also offer brokered CDs, so you can open and maintain a CD ladder in your brokerage account as well. And whenever a CD in your CD ladder reaches maturity, you can always close it and open one at another institution if you want to maintain the best rates.

CD ladder examples

Suppose you have $100,000 you’d like to stash away in a low-risk savings vehicle for a while. With a standard CD ladder structure, you could save your money this way:

  • Deposit $20,000 into a 1-year CD, then convert it to a 5-year CD when it matures
  • Deposit $20,000 into a 2-year CD, then convert it to a 5-year CD when it matures
  • Deposit $20,000 into a 3-year CD, then convert it to a 5-year CD when it matures
  • Deposit $20,000 into a 4-year CD, then convert it to a 5-year CD when it matures
  • Deposit $20,000 into a 5-year CD, then convert it to a 5-year CD when it matures

This spreads your money out so you can withdraw a portion without penalty each year. If you had opened a single 5-year CD with all $100,000 instead, all your money would be locked up for five years.

With this example, over time, each CD becomes a 5-year CD. Continue to renew the CDs at that length for as long as you want to keep your CD ladder going.

Mini-CD ladder

Although you can set up a CD ladder for any length of time, sometimes you might want more flexibility for possible withdrawals. In this case, you could set up a mini-CD ladder, which matures on a faster schedule.

Here’s how you could structure $100,000 into a mini-CD ladder:

  • Deposit $25,000 into a 3-month CD, then convert to a 1-year CD at maturity
  • Deposit $25,000 into a 6-month CD, then convert to a 1-year CD at maturity
  • Deposit $25,000 into a 9-month CD, then convert to a 1-year CD at maturity
  • Deposit $25,000 into a 1-year CD, then renew as a 1-year CD at maturity

Instead of being able to access your funds without penalty once per year, you’d be able to withdraw $25,000 (plus interest) every three months.

Mini-CD ladders sacrifice the higher interest rates that come with longer CD terms for more liquidity. However, note that yearslong CD terms are also much more common than monthslong terms.

Barbell CD

With a barbell CD, you split your deposit between short- and long-term CDs and renew your CDs when they mature. However, unlike CD ladders, you’d split your initial deposit in half instead of into several smaller deposits. You also wouldn’t open medium-term CDs.

Here’s how you could structure $100,000 into a CD barbell:

  • Deposit $50,000 into a 6-month CD, then either renew or convert into a longer CD at maturity, depending on interest rates
  • Deposit $50,000 into a 5-year CD, then renew it as a 5-year CD at maturity

By putting half your money into CDs at each end of the term spectrum, the structure resembles a heavy barbell — with the weight on each end.

If you choose to renew 6-month CDs in perpetuity, you have more opportunities to withdraw your money. However, if interest rates are much higher than when you initially opened your accounts, you can choose to renew the 6-month CD into a longer-term CD to earn more interest.

CD ladders: Pros and cons

Here are some of the key benefits of CD laddering, as well as some of its drawbacks.

Pros Cons
CD ladders offer more frequent opportunities to withdraw moneyCD ladders still have some limits as to when you can withdraw your money
CDs provide better interest rates on average than savings accountsCD ladders could have a lower overall yield than a single, longer CD
CDs ensure a guaranteed interest rate and return on your depositInterest rates could rise with your CD funds locked into a lower rate

Alternatives to CD laddering

Similar savings and investing strategies have some key differences relative to CD ladders. Here are your options if you’re looking for an alternative:

  • A single timed deposit: Instead of laddering your CDs, you could put your entire deposit in a single CD, whose terms can range from days to years. You can access your CD funds in an emergency by paying a small early withdrawal penalty (often a portion of your interest earned), and you still might receive a higher yield even with the penalty.
  • Other deposit accounts: You can earn interest on your savings without potential early withdrawal penalties by opening a high-yield savings account or money market account. Unlike most CDs, these accounts allow you to continue making deposits after opening the account. On the flip side, they often pay lower interest rates than longer-term CDs (but may have higher rates than short-term CDs).
  • I bonds: The U.S. Treasury issues I bonds as a savings vehicle to protect the value of money against inflation, so it sets the interest rate on those bonds based on an inflation metric. Note that I bonds are also a timed deposit — you won’t be able to access your funds for at least a year.
  • Bond ladders: Treasury bills and notes are as safe as CDs offered by financial institutions, and sometimes they even have higher yields. Like CD ladders, bond ladders can be opened at brokerage firms or through TreasuryDirect. You can also structure other bonds (like corporate or municipal bonds) as ladders, though those carry some default risk.
  • Dollar-cost averaging: Investors can sometimes take a similar approach to CD laddering by dollar-cost averaging — making smaller, regular investments in securities like stocks and bonds, instead of investing their money all at once. However, those investments can also carry risk.

The bottom line: Are CD ladders worth it?

CDs are useful for savers who want higher interest rates and don’t need short-term liquidity. They’re a safe, conservative way to store money, though you could lose out on some of the interest you’ve earned if you needed to withdraw money on short notice.

CD ladders offer more flexibility than a single CD, giving you more liquidity — at the cost of potentially higher returns. There are still early withdrawal penalties, but you’ll be able to access a portion of your funds more regularly.

Frequently asked questions

If you’d like to take advantage of the higher interest rates on CDs while building in more flexibility when you can withdraw your money penalty-free, CD laddering is a good strategy for deposits.

You build a CD ladder by dividing the sum of the money you’d like to deposit into smaller CDs that mature on a staggered term schedule. Once they mature, renew them into longer CDs to keep the same maturity schedule.
CDs are safe deposits, as long as you bank with an institution that has deposit insurance through the government. CD ladders help provide a stable, guaranteed return with periodic access to a portion of your funds.

You can choose however many CDs you’d like to include in your CD ladder. It may depend on how often you’d like to be able to make penalty-free withdrawals or what portion of your funds you’d like to be available at each maturity date.

You can open as many CD accounts as you want, either through your preferred financial institution or many different ones.