We handpick every product we feature. We may earn commission from the links on this page.

CD ladder: A low-risk way to maximize savings

Learn what a CD ladder is, how it works and the best strategies for using one to build your savings.

A CD ladder allows you to take the same lump sum of money that you might normally put into a single, longer-term CD (up to five years) and spread it out among multiple CDs with different terms. 

A CD ladder allows you to take the same lump sum of money that you might normally put into a single, longer-term CD (up to five years) and spread it out among multiple CDs with different terms. 

sorbetto/Getty Images

The longer a CD’s term, the higher the rate that the bank typically pays. The problem is that many people want to get their money sooner rather than later. But cashing in a CD early results in a penalty that eliminates the interest advantage of the longer term. There is a solution: a CD ladder, a series of certificates of deposit with different times to maturity. Savers not only receive higher interest than they would with a single short-term CD, but they also have greater penalty-free access to their money than they would with a single long-term CD.

Over time, you’ll have a collection of CDs with maximum maturity (and interest rates), coming due at a pace that gives you plenty of liquidity. And, there are several ways to set up a ladder, giving you maximum flexibility.

What is a CD ladder?

CDs typically offer higher interest rates than savings accounts, but they’re a commitment: You must leave your money in place until the CD matures (usually anywhere from three months to five years) or you’ll have to pay an early withdrawal penalty. A CD ladder allows you to take the same lump sum of money that you might normally put into a single, longer-term CD (up to five years) and spread it out among multiple CDs with different terms. 

This arrangement allows savers to take advantage of the higher interest rates on CDs without committing too much money to a lengthy term. A CD ladder also reduces some of the risk associated with timing CDs to rising and falling interest rates. Since you’ll have a collection of CDs with rolling maturity dates, you’ll have a regular opportunity to lock in higher interest rates. When the CDs mature, you have several options: Savers will typically renew them at the current rate for a longer term so that they eventually have a series of multi-year CDs with different maturity dates. However, if you need access to the money, you could also move some of the funds into a savings account.

What are today’s CD rates?

According to Bankrate’s weekly survey, the average CD rates for the week of March 22 are: 

  • 1-year CD rate: 1.63%
  • 5-year CD rate: 1.25%
  • 1-year jumbo CD rate: 1.71%
  • 5-year jumbo CD rate: 1.31%
  • Money market account rate: 0.31% 

How to build a CD ladder

There are several strategies you can use to build a CD ladder, depending on your savings goals and how much money you have to work with. Here are a couple of techniques to consider.

CD laddering all at once

If you have a lump sum of money to save, you can set up a CD ladder in one swoop. Start by dividing the money into four equal parts. Use it to buy four CDs with different maturities, such as  one, two, three and four years. As each CD matures, roll it over for four years. 

If you have $12,000 to invest, you would divide it up as follows:

  • $3,000 in a 1-year CD
  • $3,000 in a 2-year CD
  • $3,000 in a 3-year CD
  • $3,000 in a 4-year CD

The chart below shows how the maturity dates and terms change. In the fourth year, you will have four four-year CDs.

CD laddering over time

A CD ladder is a way to build savings over several years. Suppose you are able to save $2000 per year. That’s not enough to buy four CDs at most banks. Instead, buy a new four-year CD each year. Over time, you’ll build a ladder, as shown on the chart below.

Shortening, lengthening or fattening an established CD ladder

Because one of the CDs in a ladder comes due every year, you can also choose to take the money out rather than roll it over. While this shortens the ladder, it gives you ready access to your money without penalty. Alternatively, you can make a CD ladder longer by adding an additional CD, eventually creating a series of five five-year CDs rather than four four-year CDs. Few banks offer CDs for longer than five years, so another way to save money in a ladder is to add money to a CD when it’s time to roll over. 

Drawbacks to CD ladders

While CD ladders offer some flexibility and access to the higher rates associated with longer terms, they’re still fairly rigid. Also, if the overall rate of interest goes up, you could be stuck with several CDs at below-market rates. Making adjustments will result in paying interest rate penalties for early withdrawals. 

CD ladders: the bottom line

CD ladders are a way to build savings in federally insured bank accounts. They require some management as your liquidity needs and market interest rates change. However, they can also be a smart way to reach your savings goals and benefit from higher interest rates on CDs without locking up too much money for a long term.

Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.

This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as Financial and Home Services Editor for the Hearst E-Commerce team. Email her at lauren.williamson@hearst.com.