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What Is a CD Ladder and How Do They Work?

What Is a CD Ladder and How Do They Work?
Walecia Konrad
Walecia KonradUpdated July 26, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
A Certificates of Deposit ladder, or CD ladder, is a savings strategy that uses multiple CDs with staggered maturities to achieve a combination of interest rates while still keeping some of the deposited funds relatively liquid. The strategy can also help protect against interest rate risk.  

What Is a CD Ladder?

To understand a CD ladder, it’s best to first look at the definition of CDs. Offered through banks and credit unions, CDs lock in an interest rate for a fixed time period on a lump sum deposit. Interest is determined by a combination of the Federal funds rate, the prime rate, and the financial institution’s policies. In general, the longer the CD term, the higher the interest rate. CD maturities can range from one month to 10 years.Building a CD ladder entails dividing a lump sum investment among several CDs with different maturity dates. In many cases, a ladder includes five CDs with terms that increase from one year up to five years, but this can vary based on a depositor’s needs.

How Does a CD Ladder Work

A CD ladder works by providing investors access to a variety of interest rate returns and predictable access to their principal and earnings. Laddering can be a good strategy for investors looking for a low-risk, fixed-rate investment that will build over time. Because CDs usually charge a steep penalty for early withdrawal, ladders may be best for individuals who know they will not need the funds before maturity. Recommended: Certificate of Deposit (CD) vs Savings Account

How to Build a CD Ladder

Here are steps you can take to implement the CD ladder strategy.

Determine Your Initial Total Investment

This step is the time to decide how much of your savings you want to deposit and for how long.You’ll also want to determine where to deposit the various increments of your lump sum. CD rates vary among banks and other financial institutions. For instance, some promotional short-term CDs can have higher rates than CDs with longer maturities. You’ll need to compare rates before you build your ladder. Keep in mind, you can purchase different term CDs from different banks.Recommended: Guide to Switching and Changing Banks

Invest in Different CDs

Once you’ve decided on a total amount to deposit, you’ll now want to determine how many “rungs” to have in your CD ladder. Say you have $10,000 to deposit. A typical ladder could look 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
Of course, this example can vary depending on the initial amount and the number of years a depositor wants to ladder. There’s no need to put the same amount in each CD, but for consistency and diversity, most depositors do.

Reinvest or Cash Out at Maturity

When the CDs mature, you can decide whether to cash out or continue with the ladder. If you decide to continue, you can use the proceeds of the first CD to buy a new, five-year CD, presumably with a higher yield. You can do the same when the two-year CD matures, continuing on for as long as you want to maintain the ladder strategy.Be prepared for some active management during this phase. At some institutions, if you don’t move funds by a certain date, the CD will automatically roll over into a new CD with the same term that just ended. And if you’re depositing in a new CD, you’ll want to again shop for the best rates.

A Word About Short-Term CD Ladders

Short-term ladders work the same way as long-term ladders but with shorter-term CDs, such as 3-month, 6-month, 9-month, and 1-year CDs. This strategy can work well for some depositors during times of volatile interest rate changes.

Advantages of CD Ladders

For certain saving goals, the ladder strategy offers several advantages. Here’s a closer look.


Because they are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC), CDs and laddered CDs are one of the safest deposit options available.

Higher Interest Rates Than Savings Accounts

Because your money is tied up for a certain amount of time, CDs often pay a higher interest rate than traditional savings accounts. In addition, as long as you don’t withdraw early, CDs don’t have fees or other charges.Recommended: Should I Open a Savings Account? Is it Worth It?

Predictable Cash Flow and Returns

As the CDs in the ladder mature, you’ll know exactly how much cash flow and returns you’ll receive and the exact date you can expect them.  

Potentially Lower Interest-Rate Risk

Laddering CDs can help protect you from interest rate risk. If interest rates rise during the year, you can take advantage by reinvesting proceeds from maturing CDs into newer, higher-returning CDs. If rates fall, you still take advantage of the previous higher rates in the existing rungs of the CD ladder.This differs from depositing a lump sum in one CD. For example, if you deposit the entire $10,000 in the example above in a four-year CD, and interest rates rise over those four years, you would miss out on those higher rates until your CD matures.

Disadvantages of CD Ladders

The CD ladder strategy isn’t right for every investment scenario. Here’s a look at some of the disadvantages.

Liquidity Risk

As with all CDs, laddered CDs won’t allow you penalty-free access to your money until each CD’s maturity date. Penalties can be several months of interest or more, even if you’re cashing out close to the maturity date.There are such things as no-penalty CDs, but they usually pay lower rates than traditional CDs and are available only for short terms.

Fully Taxable

Interest on a CD is considered taxable income. If you’re in a high tax bracket, you may pay more in taxes than you would in more tax-advantaged investments. Laddered CDs can be a good choice for people in lower tax brackets.Recommended: Guide to Taxes on Savings Accounts

Lower Returns Than Other Investments

Because CDs are a low-risk deposit option, returns may be far below those of more aggressive investments such as stocks and bonds. Investment decisions should be based on specific financial needs, goals, and risk appetite.

The Takeaway

CD ladders can be a solid, low-risk strategy for building savings over time. Laddering CDs can help reduce interest rate risk and provide predictable cash flow and returns. Investors will need to understand how CD maturities work and that their money will be inaccessible for certain periods of time. Laddered CD returns are taxable and may be lower than other, riskier investments.Of course, the least risky place to put your money is a high-yield savings account. Here, you’ll earn a higher rate than you would on a traditional savings account, but still have access to your money at all times.Find today’s best high interest savings accounts with Lantern by SoFi.

Frequently Asked Questions

Can CD Ladders Lose Money?
How Many CDs Are in a CD Ladder?
Is It Better to Have One CD or Multiple CDs?
Photo credit: iStock/Kateryna Onyshchuk

About the Author

Walecia Konrad

Walecia Konrad

Walecia Konrad is an award-winning financial journalist with 25 years of experience in print and digital media. She is a graduate of Syracuse University and specializes in the topics of health care, personal finance, and employer-sponsored benefits. Konrad's work has been seen on CBS MoneyWatch, The New York Times, Money, SmartMoney, BusinessWeek, and Forbes. She has been the recipient of both a Pearl Award for Best Web Publication of the Year and a National Magazine Award for Personal Service.
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