What Is a CD Ladder?

A CD ladder combines the best of short- and long-term CDs: frequent access to funds and high rates.
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Written by Spencer Tierney
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What is a CD ladder?

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. The trade-off is that you lose access to funds for periods of time. A CD ladder provides an effective alternative to putting a lump sum of money in one short- or long-term CD. A short-term CD is generally one year or less, and a long-term CD can be four years or longer. CD ladders usually have midrange CDs, which include two- and three-year CDs. (See more about CD terms.)

» Ready to explore? Browse the best CD rates for this month

Key takeaways:

  • A CD ladder involves opening CDs of different term lengths and regularly renewing short-term CDs for longer terms.

  • This tactic lets you benefit from long-term CDs’ higher rates and short-term CDs’ frequent access to funds.

  • Consider a CD ladder strategy if you want to take the pressure off of trying to open CDs based on when rates rise or fall. In effect, you decrease the risks of locking in a low CD rate if rates are about to rise and missing out on high rates if rates are about to drop.

🤓Nerdy Tip

Some banks have started lowering CD yields, though overall rates remain high. With a CD, you can lock in high rates while they’re still around.

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How to build a CD ladder

Here’s a CD ladder example:

Step 1. Open the initial CDs

A CD ladder involves dividing your investment — usually evenly — into several CDs of different term lengths with staggered maturity dates. A traditional CD ladder model has five “rungs” with CD terms that increase by one year up to five.

If you had $10,000 to invest, you would spread out your money like this:

  • $2,000 in a one-year CD.

  • $2,000 in a two-year CD.

  • $2,000 in a three-year CD.

  • $2,000 in a four-year CD.

  • $2,000 in a five-year CD.

Step 2. Reinvest each CD when it matures

As a CD matures, put that money into a new five-year CD. After five years, your ladder will have five five-year CDs, and one will mature each year.

Here’s how that would look:

  • $2,000 + one year of interest in a five-year CD.

  • $2,000 + two years of interest in a five-year CD.

  • $2,000 + three years of interest in a five-year CD.

  • $2,000 + four years of interest in a five-year CD.

  • $2,000 + five years of interest in a five-year CD.

The flexibility comes into play after each CD matures. Although a CD ladder works by reinvesting each sum into a new CD at least once, you might break up the ladder if rates are too low or your savings goals change. In that case, you might choose a different account for your funds, such as a savings or brokerage account. (Bear in mind that CDs may be set to automatically renew so be ready to withdraw at their maturity date. Learn more about when CDs mature.)

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Benefits of CD ladders

CD laddering provides several benefits:

  • Increased accessibility: Your cash will become available to you at frequent intervals. Remember that CDs often have early withdrawal penalties if you break the seal before the term ends. (Learn more about how penalties work.)

  • Flexibility: You can decide how you want to split up your investments and whether to reinvest each time a CD matures.

  • Better interest rates: You’ll be able to choose longer-term CDs with higher rates and still have certificates maturing regularly. Generally the longer a CD's term — and sometimes the larger your deposit — the higher your rates.

  • Reduced risk of missing out on future high rates: If interest rates go up after opening one CD, you can take advantage of the higher rate the next time you open a CD. On the flip side, if rates fall, you still have money invested in long-term CDs that come with higher rates. Learn more in our CD rate forecast.

🤓Nerdy Tip

Flipping the traditional trend, rates on one-year CDs lately have been higher than on five-year CDs.

» Curious why rates are what they are? Learn more about historical CD rates

Downsides to CD ladders

Laddering CDs has some caveats and limits:

  • Multiple maturity dates to track: Starting the day a CD ends, you generally have a short time window of about one week to 10 days to withdraw funds from a CD penalty-free. Otherwise, banks may automatically renew CDs for the same or a similar term to what was originally chosen.

  • No guarantee that the rate of return will beat, or even be close to, inflation: What a CD ladder offers is multiple opportunities to lock in CD rates at different times. This strategy can be helpful, especially during a rising-rate environment, but inflation may still play a heavy hand in your finances. Learn more about saving strategies to lessen inflation’s impact.

Alternative CD ladder structures

Mini CD ladder

If you’re unsure about long-term CDs but want stable returns for a few years, you can build a CD ladder involving all short terms: three months, six months, nine months and one year. The process would work the same as with a more traditional CD ladder, except you get access to some funds every three months for two years. Rates will be quite a bit lower since you’re focusing on short-term CDs.

Uneven splits

Another option is to spread out money in different amounts for your CDs. This approach requires some understanding of economic projections, especially the direction of interest rates.

When interest rates are rising, consider investing a higher percentage of your investment in shorter-term CDs. When rates are going down, aim to lock more of your money in the longest-term CDs you can afford. Keep in mind that a ladder with equally divided investments offers the widest safety net for your money to grow.

» Prefer higher returns over safety? Learn more about brokerage accounts

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CD ladder alternative for more risky investments

If the concept of a CD ladder appeals to you and you can handle more risk with your investments, you might be interested in dollar-cost averaging. This investing strategy shares a similar goal of reducing risk by spreading out your money, in this case in stocks or fund purchases, at intervals and in even amounts. Learn more about dollar-cost averaging.

Your perfect ladder

One of the best things about laddering is that you don’t have to follow a single model. You can vary the amount you put in each CD depending on how much you expect to need at future intervals, or vary the intervals when your CDs mature. Your perfect CD ladder should suit your investment time frame, desired access to funds and comfort level when investing.

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