CD Ladder: What It Is And How to Build One | Bankrate (2024)

CD Ladder: What It Is And How to Build One | Bankrate (1)

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Key takeaways

  • A CD ladder consists of opening several CDs with different maturity dates.
  • A CD ladder’s benefit is you can earn high rates and also have access to portions of your money at frequent intervals.
  • With a ladder, you can decide how much money to deposit in each CD and whether to reinvest in a new CD when each CD matures.

A CD ladder is a savings strategy where you invest in several certificates of deposit (CDs) with staggered maturities. Although CD rates are currently higher for shorter-term CDs, setting up a CD ladder would allow you to get those high rates for the short term, while also taking advantage of some longer-term stability to withstand market fluctuations.

With this strategy, you’ll redeem funds more often than if you put all of your savings in a long-term CD, while still reaping some long-term, predictable benefits.

How to build a CD ladder

Here’s an example of how to set up a CD ladder. Let’s say you want to build a five-year CD ladder with five rungs. If you have $2,500 to invest, then you might divide the funds equally into five CDs with different maturity dates. Here’s how you could set it up:

1. Open the CDs. You’ll open five CDs with terms ranging from one year to five years as follows:

  • $500 into a one-year CD
  • $500 into a two-year CD
  • $500 into a three-year CD
  • $500 into a four-year CD
  • $500 into a five-year CD

2. Reinvest the money when the CDs mature.

When the first CD matures after a year, you can continue to build your ladder by reinvesting the funds in a new CD. Then, when the two-year CD matures, use the proceeds from that account to open a new CD. Continue the process each year for as long as you want to maintain the CD ladder. You can also choose to cash out the CDs and use the money for other purposes, depending on your financial needs and goals.

The CDs don’t have to hold the same amount of money, so you may opt to open each one with varying balances to accumulate a higher yield. For example, you might want to invest more in shorter-term CDs while their rates are high. Just remember that there’s usually an early withdrawal penalty for taking out the funds before the CD’s maturity date.

As you build your CD ladder, there’s no obligation to open all of your CDs at the same bank or credit union. In fact, it’s a good idea to shop for the best CD rates for each term.

Alternative CD ladder structures

There are several ways to modify a traditional CD ladder strategy based on your goals:

  • Mini CD ladder: Creating a CD ladder with only shorter-term CDs could be an option for savers who don’t wish to invest in longer-term ones. For instance, such a ladder could consist of terms of six, nine, 12 and 18 months.
  • Barbell CD ladder: A barbell CD strategy is similar to a traditional CD ladder, but the middle rungs are missing. As such, short-term CDs make up one end of the structure, while long-term CDs comprise the other end. A potential benefit of this is you could have access to some of your funds sooner, while taking advantage of longer terms with higher rates.
  • Bullet CD ladder: A bullet CD strategy consists of opening several CDs over time, of varying term lengths, that will all mature at once. An example would be opening a five-year CD now, a four-year CD in a year and a three-year CD in two years. This can come in handy when you’re planning for a large expense. You won’t have to come up with all of the funds at once, giving you time to save more money to commit to additional CDs.

Benefits of a CD ladder

  • CDs offer a guaranteed rate of return.
  • You can take advantage of higher rates on shorter-term CDs while having some funds earn predictable rates for longer terms.
  • If rates rise, you can reinvest the money from shorter-term CDs into new accounts to lock in higher APYs.
  • Keeping some funds in shorter-term CDs ensures that your money is more accessible than if it were all kept in a long-term CD.

Drawbacks of a CD ladder

  • You could be missing out on higher returns from more aggressive investments, such as stocks or bonds.
  • If interest rates decline, you might be reinvesting the money from a matured CD into lower rates.
  • If you end up investing too much in longer-term CDs, you may find yourself having to withdraw money before the maturity date and get hit with a penalty fee.

Are CD ladders good investments?

A CD ladder can help you build a predictable investment return. It also provides the potential to earn better returns than you would with a single CD and the ability to access a portion of your savings each time a CD matures.

While there’s no risk of losing any of your money in an FDIC-insured CD, you could potentially miss out on the opportunity to earn a better rate if you reinvest shorter-term CDs when rates decline. Plus, you’ll potentially lose out on better returns offered by other investment vehicles with greater growth potential.

Consider your reason for opening a CD ladder before committing to one. It could be a great fit for your short-term savings goals, but a long-term savings effort might require an additional boost from other investment vehicles.

– Bankrate’s Karen Bennett updated this article.

CD Ladder: What It Is And How to Build One | Bankrate (2024)

FAQs

CD Ladder: What It Is And How to Build One | Bankrate? ›

A CD ladder consists of opening several CDs with different maturity dates. A CD ladder's benefit is you can earn high rates and also have access to portions of your money at frequent intervals. With a ladder, you can decide how much money to deposit in each CD and whether to reinvest in a new CD when each CD matures.

What is a CD ladder and how do you build one? ›

A CD ladder is a savings strategy to spread a lump sum of cash across multiple certificates of deposit to take advantage of higher rates — usually in long-term CDs — while freeing up portions of that money at short-term intervals. CDs tend to have the highest interest rates among savings accounts.

Is laddering CDs a good idea? ›

It's a secure investment that delivers an expected return over time. The advantage of a CD ladder is you get to enjoy some exposure to higher rates from longer-term CDs without as much risk of early withdrawal fees.

How much money do you need for a CD ladder? ›

Things to consider

A CD ladder can be purchased in multiples of $4,000 (for 4-rung ladders) or $5,000 (for 5-rung ladders), so think about how much you want to invest in this less liquid strategy while maintaining a certain amount of liquidity for planned or emergency spending needs.

How much does a $5000 CD make in a year? ›

How much interest would you make on a $5,000 CD? We estimate that a $5,000 CD deposit can make roughly $25 to $275 in interest after one year. In comparison, a $10,000 CD deposit makes around $50 to $550 in interest after a year, depending on the bank.

Are CD ladders good for retirees? ›

If you are retired, you could find building a CD ladder beneficial. This safe investment can help you maximize your returns, while reducing the chances your retirement accounts run dry while you're still relying on them.

What is a CD ladder for dummies? ›

Instead of putting all your money into a single CD with a fixed term, you divide your savings into several CDs, each with a different maturity date. These dates are carefully spaced out, creating a ladder-like structure.

Why is my CD ladder losing money? ›

A Certificate of Deposit (CD) could lose money if funds are withdrawn early, incurring penalties that may exceed earned interest. CDs are generally low-risk and guarantee a fixed interest rate for the term. Early withdrawal penalties can sometimes reduce the principal, not just the interest.

What is an example of a CD ladder? ›

Say, for example, you've opened three CDs spaced six months apart: One CD matures in six months, another matures in 12 months and a third CD matures in 18 months. Once a CD matures, you can then choose to withdraw your funds or reinvest them into a new 18-month CD.

Are CD ladders FDIC insured? ›

A CD ladder is a group of FDIC insured, guaranteed rate CDs working together as one investment.

How much will a $10000 dollar CD earn? ›

Earnings on a $10,000 CD Over Different Terms
Term LengthAverage APYInterest earned on $10,000 at maturity
1 year1.81%$181
2 years1.54%$310.37
3 years1.41%$428.99
4 years1.32%$538.55
1 more row
May 14, 2024

How are CD ladders taxed? ›

They are fixed-income investments issued by banks and pay interest at a stated rate for a specific time period. CD interest is taxed at the rates applicable to ordinary income, up to 37% at the top federal tax bracket rate for 2023.

Do you pay taxes on CD interest? ›

Key takeaways. Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.

What if I put $20,000 in a CD for 5 years? ›

How much interest would you earn? If you put $20,000 into a 5-year CD with an interest rate of 4.60%, you'd end the 5-year CD term with $5,043.12 in interest, for a total balance of $25,043.12.

How to avoid tax on CD interest? ›

If the CD is placed in a tax-deferred 401(k) or individual retirement account (IRA), any interest earned on the CD may be exempt from paying taxes in the year it was earned. 2 Instead, you will pay taxes on that money when it is withdrawn from the 401(k) or IRA after you retire.

Who has the highest paying CD right now? ›

Best 1-Year CD Rates
  • Abound Credit Union – 5.25% APY.
  • Mountain America Credit Union – 5.25% APY.
  • KS State Bank – 5.25% APY.
  • Forbright Bank – 5.25% APY.
  • Merchants Bank of Indiana – 5.25% APY.
  • Seattle Bank – 5.25% APY.
  • Bread Savings – 5.25% APY.
  • Utah First Credit Union – 5.25% APY.

What is an example of a CD laddering strategy? ›

Example of a CD ladder

Say you use $25,000 to build a CD ladder that matures in one-year increments: $5,000 in a 12-month CD with 2.50% APY* $5,000 in a 2-year CD with 2.55% APY* $5,000 in a three-year CD with 2.60% APY*

What is the best length for a CD ladder? ›

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.

Is a CD ladder better than a bond ladder? ›

If you prefer to hold more in cash, a CD ladder could be used to potentially increase yield. A CD ladder works the same way as a bond ladder except the maturities are usually shorter (3 months – 3 years). These strategies could be used together as well.

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