CD ladder: What you need to know

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In a Nutshell

Using a CD ladder means opening multiple CDs with staggered maturity dates. The longer-term CDs will let you take advantage of what are generally the highest CD interest rates but with little access to your funds, whereas the shorter-term CDs let you access money at regular intervals and at slightly higher interest rates than other types of savings accounts.
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A certificate of deposit, or CD, allows you to tuck away money for a set interest rate over a fixed time frame. CD ladders take those investment products one step further.

A CD ladder is a strategy of opening several certificates of deposit that mature at staggered intervals. When a CD finishes a term, you can roll those funds into a new, longer CD. The main benefit for investors here is that they can access funds periodically without paying an early-withdrawal fee.



Benefits of CD ladders

There’s a lot to like about these investment tools, from accessibility to security.

Accessibility: Having relatively frequent, periodic access to your funds allows you to plan your budget. You can also access the money for an emergency (though you’d still have to pay an early withdrawal penalty if the timing’s not right — more on that below).

Higher interest rates: You can generally get higher interest rates than you would on other financial products, like money market accounts.

Low risk: So long as you follow the CD’s terms, you’ll get back your principal, plus whatever interest you’ve earned.

CDs are also considered a low-risk way to go because they’re insured for up to $250,000 by the Federal Deposit Insurance Corporation (for bank products) or the National Credit Union Administration (for credit union products). But here’s a word of caution when CD laddering at the same institution: Once your CDs are collectively worth more than the $250,000 limit at a single FDIC- or NCUA-insured bank, you’ll lose that protection on the amount that exceeds the limit. However, the insurance limit resets at each insured financial institution where you hold an account. That means you could be insured for more if you spread your CD ladder out across different insured banks or credit unions.

Drawbacks to CD ladders

CD laddering isn’t for every investor. Here’s why.

It’s hands-on: Every time a CD matures, there’s a little work involved. Whether you cash out the CD or reinvest it, you’ll need to handle the details. This may not appeal to investors who want to “set it and forget it.”

You could miss out on rising rates: CDs come in varying lengths, from a few months to 10 or more years. So if some of the rungs on your CD ladder have longer terms, you may be locked out from your funds along with the chance to get a higher interest rate if rates happen to rise in the interim. (On the flip side, creating a ladder with shorter terms can help avoid missing out on rising rates because you can reinvest the funds in another CD or investment should interest rates increase.)

Early-withdrawal penalties: Want to dig into your CD before the maturity date? If your CD comes with an early-withdrawal penalty, you’ll be eating away at earned interest when pulling your funds. CD laddering helps mitigate the need for early withdrawals, but it’s possible you’ll still decide to break a CD term.

Before you make the climb

Before creating your CD ladder strategy, do some prep work to make sure the investment fits your needs.

Check your emergency reserves

Make sure you have an emergency fund to cover any short-term problems you might run into. If all your savings is in your CDs, you’ll risk having to pay an early-withdrawal fee if an emergency comes up and you don’t have enough to cover it in your regular accounts.

Set your financial goals

Your financial targets might include goals like a vacation in the next year, a bigger emergency fund in two years or a down payment on a house in five years. Use your CDs strategically by lining up your CD ladder maturities to cash out when you plan to meet those goals.

Shop around for interest rates

There are plenty of banks and credit unions that offer CDs. Consider whether you value convenience, customer service, higher interest rates or some other factor. Maybe a nearby bank offers a high rate, or an online credit union has a minor penalty for early withdrawal.

How to put together a CD ladder

There’s not one “right” CD ladder strategy. You can put your money in a mix of short- and long-term CDs that best suit your investment time frame and your need for income and liquidity. Here’s a simple example of how to create a CD ladder.

Step 1: Open the CDs

Let’s say you have $20,000 to invest. How do you want to split up the money? For this example, let’s say you decide to divide your money into four equal parts and open four CDs at once. Stagger the maturity dates so they align with when you need the money. Mark your calendar so that you know when each matures.

  • CD 1: $5,000 in a six-month CD
  • CD 2: $5,000 in a 12-month CD
  • CD 3: $5,000 in a three-year CD
  • CD 4: $5,000 in a five-year CD

Step 2: Reinvest the money

Here’s the “hands-on” part we mentioned earlier. As your CDs mature, the bank may give you a grace period in which you can withdraw money, add money or change the term. Instead of just letting your CD roll over, look around for a new CD with a better rate. Longer-term CDs, such as five years, often get higher returns.

If you open all your CDs in 2018, here’s what your maturity dates will look like and the types of terms you could roll into.

  • CD 1: In 2019, roll the funds into a one-year CD
  • CD 2: In 2019, roll the funds into a two-year CD
  • CD 3: In 2021, roll the funds into a five-year CD
  • CD 4: In 2023, roll the funds into another five-year CD

Step 3: Repeat or cash out

Every time a CD becomes due, ask yourself whether you need the money for one of your financial goals — or whether you can roll all (or part) of it into a longer-term CD at a higher interest rate.


Bottom line

A CD ladder is best for investors who want to keep all or part of their cash in low-risk investments that have higher returns than your average savings or money market account.

If that sounds like you, then sort out your short-term financial timeline, shop around for the best CD rates and plan your CD ladder to coincide with your financial goals.


About the author: Kim Porter is a writer and editor who has written for AARP the Magazine, Credit Karma, Reviewed.com, U.S. News & World Report, and more. Her favorite topics include maximizing credit… Read more.