What Is a CD Ladder? A Unique Savings Strategy Explained

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A CD ladder is a great way to maximize interest earnings on your short-term savings while maintaining the flexibility of a regular savings account. Here's what you may want to use a CD ladder for and how to set it up.

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A CD ladder is one of the best ways to maximize interest earnings on short-term savings.

Everyone wants a sure thing when it comes to money. They want to invest their money without losing it and get a huge return without inheriting any risks. They want to have both the comfort and security of a savings account with the high returns of a mutual fund in an IRA.

Unfortunately, you can’t always get what you want. The more returns you want, the more risk you need to take on. This is true whether you’re saving for retirement, your vacation home, or a simple emergency fund.

This is where a CD ladder comes in. A CD ladder combines the safety of a CD with the flexibility of a savings account. It gives you the higher returns of CDs, but with less structure.

What Is a CD Ladder?

A CD ladder is when you stagger your CDs so they all mature at different times. The purpose of a CD ladder is to keep your money liquid (or available to withdraw) like with a savings account while earning the higher interest rates that come with CDs.

When you withdraw money from a CD before maturity, you have to pay a penalty. This can considerably negate any interest you’ve earned up to that point. It’s not a good idea to open a CD or use a CD ladder unless you’re very sure you won’t need the money until the first CD matures.

CD ladder example

To create a CD ladder, you first want to choose a bank with high interest rates on its CDs. Let’s say you find a bank with a 6-month CD at 1% interest, a 12-month CD at 2% interest, and an 18-month CD at 3% interest.

After six months, your first CD matures and you decide to renew it. You buy an 18-month CD with the money. When the 12-month CD matures six months later, you buy another 18-month CD. This creates a CD ladder where you get access to funds every six months. This means that every six months, you’ll decide whether to open a new CD or withdraw the money plus the interest you earned.

A CD ladder that matures every six months is better than putting all of your money in an 18-month CD because you don’t have to actually wait 18 months to claim your money. Therefore, a CD ladder provides more flexibility and access than just using a traditional CD.

CDs are the basis of a CD ladder

A CD ladder is composed of several CDs or certificates of deposit.

A CD is a savings vehicle offered by banks and credit unions that is similar to a savings account. When you open a savings account, you deposit the money and let it sit. You earn interest on the amount and can withdraw it anytime you want.

With a CD, on the other hand, you have to open the account for a certain length of time. Typically, that’s between six months to five years. The longer a CD’s maturity period, the more interest you’ll earn.

This makes it different from a savings account, which has no specific term requirement. Some banks also have a minimum deposit for CDs, between $500 and $10,000, while others have no requirement.

Like a savings account, CDs are FDIC-insured up to $250,000 per person. That means you won’t ever lose money on a CD as long as it’s below the insured amount. This makes CDs conservative investments, perfect for funds you need in the short term.

How to build a CD ladder

Even though a CD ladder might seem tricky, it’s actually quite simple to set up. You just need to know how much of your money you want to be tied up and what kind of timeline you’re on. Here’s a step-by-step guide on how to create a CD ladder for yourself.

Choose your CD laddering strategy

Once you decide to create a CD ladder, you’ll need to figure out how you want to stack the CDs.

This depends on when you want access to money. If your CD ladder is for a house you want to buy in five years, then you’ll want all your money to be available in five years. If you want a place to keep your emergency fund, then your CD ladder should probably mature every three months, just in case something happens.

A CD ladder should be specific to your needs. If you’re having trouble figuring out how to create one for yourself, you can ask a financial planner or even contact your bank. They can run you through the options and explain the penalties, interest rates, and other details.

Open your CDs

Once you know what kind of CD ladder you want, it’s time to actually open your CDs.

Make sure to shop around before deciding on your CDs since every bank and credit union has its own rate schedule. The interest rates will determine how much money your CD ladder earns so it’s wise not to jump ahead. Look at as many banks as possible to make sure you’re getting the best value.

Renew or withdraw

When your CDs mature, you’ll need to decide whether to renew them or withdraw the funds. To keep your ladder going, renew for however long you want.

If you do need the money, then you can go ahead and withdraw it. You can also choose to withdraw a portion of it and renew the rest. Because you’re withdrawing the funds after the date of maturity, you won’t have to forfeit the interest.

CD Ladder FAQs

Even though a CD laddering strategy may seem simple, we get quite a few questions about the specifics. Here are some of the ones you may be asking.

Is a CD Ladder worth it?

Creating a CD ladder can seem difficult and not worth it to the average consumer; but if you’re serious about maximizing your dollars, you should learn what a CD ladder is and how it can help.

Read on to see what a CD ladder is, if you should use one, and how to set it up.

Is a CD Ladder a good investment?

A CD ladder is a good investment if you’re certain you don’t need the money until the CDs have matured. Because you face a penalty when you remove a CD early, there’s no benefit to keeping the money in a CD unless you’re 100% sure you won’t need it.

For example, a couple looking to buy a house shouldn’t keep their money in a CD ladder if they’re already looking for homes and planning to buy in the next couple of months.

Likewise, a CD ladder isn’t the best place for long-term investors or people who are saving for retirement. CD rates typically max out at 3% interest, while the S&P 500 has an all-time rate of return of 9.8%.[1] A CD ladder is more appropriate for storing your emergency fund, not for building a nest egg.

What are the benefits of CD laddering investments?

The main benefit of CD laddering investments is that you earn more interest than by keeping your money in a savings or money market account. Plus, by staggering your CDs, you can achieve more flexibility than putting your money all in one CD.

CD ladders also provide a hedge against interest rate risk, which is when an investor has all their money tied up in a fund that has a lower interest rate than the current rates.

Can I use a CD ladder for my emergency fund?

A lot of people create a CD ladder emergency fund because they don’t want it to lose value while it’s sitting in a bank account. Other reasons for opening a CD ladder include saving for a down payment on a mortgage or a new car. In general, if you have a huge stash of money that you can’t invest in the stock market, a CD ladder may be an appropriate place to store it.

Interest rates for CDs vary based on the term. A CD with a six-month term will have a lower interest rate than a five-year one.

Will I owe taxes on my CD interest?

Interest earned on a CD will be reported to you through a 1099-INT form, which you’ll have to claim on your taxes. You only receive one of these forms when the CD matures and the interest hits your account.

There is no way to avoid paying taxes on interest earned from your CD, so just be prepared when tax time comes around. If you end up owing more than you expect, you can adjust the withholding on your W4 so as not to have a huge bill come April.

Luckily, unless you earn hundreds or thousands in interest from your CD ladder, you probably won’t notice a huge difference on your taxes because of the CD ladder. If you’re somehow worried about the state of your taxes with a CD ladder, you can consult a CPA to get more specific advice.

Related: Do I Have to Pay Taxes on Earnings Generated by My Bank Accounts?

Will a CD ladder earn more interest than a savings account?

Consumers use a CD ladder because they want an insured savings vehicle that will also generate interest. 

If you pick a CD ladder with short terms, your rates may be the same or less than a savings account. In that case, you’ll lose out on the flexibility of a savings account for no reason.

Also, if you end up withdrawing money from a CD before the term is over, you could forfeit most or even all of your interest. That could drag down your earnings to less than a savings account. Before installing a CD ladder, make sure that you can handle your money being tied up.

What are the downsides to a CD ladder?

The biggest downside to a CD ladder is that your money is trapped in a CD unless you withdraw it early and pay a penalty. That makes a CD ladder less liquid than a savings account, which isn’t ideal if you need your money in the very near future. If you need to access your funds quickly, you shouldn’t hold it in a CD ladder.

Another downside to a CD ladder is that it can be tricky to set up if you don’t fully understand the concept. Opening a savings account is much easier and can provide a decent return if you choose the right bank.

If you put too much money in a CD ladder and need to withdraw it right away, you’ll have to pay an interest penalty on the account. Before creating a CD ladder, think of some possible scenarios that might cause you to need money quickly. Then determine how much you need to comfortably have in your savings account. You can deposit the remaining amount in a CD ladder.

If you need to withdraw money from a CD ladder but it’s close to maturity, see if you can hold off. Borrow money from a friend or take on some side hustle work. Giving up those returns would negate the benefits of a CD ladder, so always find another way if you can help it.

A CD Ladder Can Be a Great Way to Save Money

When you implement a CD ladder for your emergency fund or other short-term investment goals, you can earn more interest than if you kept the money in a savings account, especially if you find high-earning CDs.

Plus, the money will be less easily accessible than if it were kept in a savings account, which should prevent you from spending it unnecessarily. If you’re the type of person who thinks a sale at Nordstrom is an emergency, then having your money in a CD ladder might prevent you from making impulse purchases.

If you stack a CD ladder effectively and never withdraw it ahead of time, you’ll get the best return without sacrificing security. That’s part of what makes a CD ladder so attractive — it combines the safety of a savings account with the interest rates usually only available to high-net-worth clients.

Zina Kumok

Hi, I'm Zina! I'm a personal finance expert with a passion for helping millennials figure out their most pressing financial issues. My interest is personal -- I paid off my student loans in three years and have been helping others take control of their finances ever since. My work has been featured in the Washington Post, Fox Business, Time, Quicken Loans, LendingTree, Forbes, Money.com, Mint, and many more.  I currently live in Indianapolis, IN with my husband and two dogs.

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