What Is a CD Ladder and How Do You Build One?

Laddering can help you mitigate the risks and take advantage of changing interest rates.

A man looks up to climb a ladder propped up against a stack of giant coins.
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A certificate of deposit is a type of savings account with a set maturity date and a fixed rate of interest. It requires a lump sum deposit at the outset, after which you can't withdraw your funds until the end of the term without getting hit with a penalty. A CD ladder is a financial maneuver that involves buying multiple certificates of deposit with staggered maturity dates. This can mitigate the risks of tying up your money for extended periods and lets you take advantage of interest rate changes. But there are risks, too. Here's everything you need to know about CD ladders.

How a CD ladder works

CD terms usually last between three months and five years. Depending on the term, you may be offered a different interest rate, often referred to as an APY, or annual percentage yield. Sometimes a one-year CD will have a higher interest rate than a two-year CD, or vice versa. 

To build a CD ladder, you open multiple CDs with staggered maturity dates. This allows you to take advantage of higher rates on longer-term CDs while maintaining some liquidity in the short term. For example, if you have $20,000 to invest, you might break it up like this:  

  • $5,000 in a three-month CD, at 1.9% APY 
  • $5,000 in a six-month CD, at 2.3% APY 
  • $5,000 in a nine-month CD, at 1.8% APY 
  • $5,000 in a one-year CD, at 2.6% APY  

In this example, one of your CDs matures, giving you access to $5,000 (plus interest) every three months. You still get to take advantage of some of the higher interest rates, but your risk is reduced. Once each CD matures, you can either redeem that CD or reinvest the funds to extend your ladder.

Benefits of a CD ladder

A CD ladder has several benefits, including increased access to cash, flexibility and better interest rates.  

  • Interest rates: The main benefit of a CD ladder is the ability to take advantage of higher interest rates than with more liquid options like savings accounts or money market accounts. The typical tradeoff is that CDs are typically less liquid than other options, but a ladder provides a way to mitigate that tradeoff.
  • Less risk: If you had all of your money in a single CD, there is a higher risk that you'd need to withdraw your money before the maturity date and incur penalties, rather than having a portion of your CDs mature on a predictable schedule.
  • Higher liquidity: Every time a CD matures, you have access to the funds. And once a year (or whatever interval you choose), your ladder shifts and some of your cash is accessible without penalty. This enables a sort of loophole around CD withdrawal restrictions.

Drawbacks of a CD ladder

Not all the drawbacks of a CD can be overcome through laddering.

  • Penalties still exist: If you need to withdraw your money before the CD matures, you will be charged a penalty. 
  • Macroeconomic risk: A CD ladder may not be as effective in a low interest rate environment, and you could lose out to inflation. CD interest rates tend to be lower than those associated with other investments, which means that your money may not keep pace with inflation during periods of rising prices.  

What to consider as you build a CD ladder

Before building your CD ladder, consider your financial goals, the state of the economy and whether interest rates are likely to increase or decrease in the near future. It's a good idea to think about your investment time frame, and comfort level with tying up your money for a period of time. Make sure you have an emergency fund on hand to reduce the risk of needing to make an early withdrawal.

The bottom line

A CD ladder can be an effective strategy for earning interest on your money. But there are risks, so you should plan accordingly. A CD ladder may be less effective when interest rates are low, as you may lose out to inflation. They can be a good resource when interest rates are high, with less risk exposure than with stocks or bonds. That noted, government-backed I bonds can be a good alternative to a CD. 

Correction, 7:30 a.m. PT Jan. 25: An earlier version of this article suggested an example that if you have $25,000 to invest, you might break it up among four CD terms, each with amounts of $5,000. The article has been corrected to clarify the lump sum is $20,000.