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Banking Certificates of Deposit

CD Ladders: How Do They Work + Are They Worth It?

Creating a CD ladder made up of CDs with staggered maturity dates lets you earn more interest and keep regular access to your savings.

Robin Kavanagh
Lauren Graves
By Robin Kavanagh
and Lauren Graves
Jess Ullrich
Edited by Jess Ullrich
Updated Dec. 17, 2024
Fact checked

Certificates of deposit (CD) are a type of savings account that earns a fixed interest rate over a set period. Unlike traditional savings and other variable-rate accounts, CDs offer predictable interest. They also often have some of the best rates. For example, according to FDIC data, the national average rate on a savings account is currently 0.43% (as of 11/18/24), while the average CD rates range from 0.23%-1.84% (as of 11/18/24). But the catch is you have to lock up your money for the CD’s term, or you’ll get slapped with a penalty fee (it’s easy to see why they’re often called time deposit accounts).

This is where CD ladders come in. CD ladders let you take advantage of competitive certificate yields — plus steady earnings — while keeping your savings somewhat more liquid. You create a CD “ladder” by opening multiple accounts and timing the maturity dates to be close together.

Here is a closer look at how CD ladders work and when they’re worth it.

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What is a CD ladder?

A CD ladder is a collection of CDs with staggered maturity dates. There is no single type of CD ladder, and you can choose any terms you want. You might see people setting up ladders like this:

  • 1-year CD
  • 2-year CD
  • 3-year CD
  • 4-year CD
  • 5-year CD

Alternatively, you can create a much shorter or longer ladder. For example, I set up one with four CDs with three-, six-, nine-, and 12-month terms. I did it this way because I didn’t want to wait years to free up my money, and CD rates were best for short terms (and I called it a stepladder).

How does CD laddering work?

By timing your CD expiration dates so your accounts reach maturity one at a time, you “unlock” your savings on a rolling basis. When a CD matures, you can do something else with the money or reinvest it in another CD (at whatever term offers the highest rate) to continue the ladder.

CD laddering is about giving yourself flexibility and capitalizing on the best rates you see. Instead of locking all your money into one term at a rate that may or may not stay competitive with what’s currently available, you spread it around strategically to ensure your savings earn as much as possible.

However, it’s important to note that CD ladders are still less liquid than typical deposit accounts. While you can add and remove money freely from checking and savings accounts, opening a CD is generally a one-and-done transaction. You can’t add more money once your account is set up, and you can’t take most of it out (unless you want to pay huge fees).

How to create a CD ladder

You can open a CD with a bank, credit union, or online institution offering banking services, like a fintech. You generally create a ladder yourself by just opening multiple accounts at one time, which the majority of banks let you do anyway. But some — like Ally Bank, for example — may provide tips for setting up a CD ladder (see Ally’s guide to laddering).

Here are the basic steps to creating a CD ladder:

  1. Choose your terms: Many CDs have terms between six months and five years, but you can also find terms as short as one or three months and as long as seven or 10 years.
  2. Decide how much you want to invest: This is the most important consideration when opening a CD. You want to deposit an amount you’re completely comfortable with not touching for the longest term in your CD because most CDs charge early withdrawal penalties that could mean losing a sizable chunk (or, in some cases, all) of your interest.
  3. Deposit funds: CDs are easy to set up. You’ll add the amount you want to save to each CD, making sure to meet minimum deposit requirements. Many CDs have minimums of $500 or $1,000.

Check out this example ladder where you have $20,000 earmarked for a CD ladder.

Example CD ladder

Deposit APY Total interest
1-year CD $4,000 4.20% $171.27
2-year CD $4,000 4.00% $332.57
3-year CD $4,000 3.90% $495.62
4-year CD $4,000 3.85% $664.81
5-year CD $4,000 3.80% $835.55

In the above example, interest compounds monthly and is allowed to accrue.

In this ladder, you have a CD maturing every year. You have access to rates for both short- and long-term CDs, and your money grows with compound interest to earn you a total of just shy of $2,500 without reinvesting any of it.

What to do with the interest in a CD ladder

During a CD’s term, you may be able to have your CD’s interest paid directly to you or let it grow. After, you might choose to reinvest it.

Get direct payments

For some CDs, you can choose to have the interest paid directly to you throughout the length of the term. If you choose this option, you’ll miss out on compound interest, or interest you earn on your interest, but get a stream of passive income.

I recommend CD ladders with interest payments to those nearing retirement, as you can count on steady and predictable money. However, not all institutions that offer CDs permit penalty-free interest payments (often called disbursements), so be sure to seek one out. Marcus by Goldman Sachs and Bread Savings are a couple of online banking platforms I like for this.

Leave it alone

You could also leave interest alone to let it accrue on a CD. If you choose this option, the interest is added to your balance each time it is credited, increasing the overall amount that will be used to calculate earnings for the next time. This is how you can earn the full annual percentage yield (APY) on an account, which is the interest rate with compounding.

Reinvest it

When the first CD matures, you have some choices to make. You could take the money and run, or you could open a new CD that would continue your ladder. If you continue the ladder, your new CD could be for the longest term you had before or for the highest rate currently available.

Tip
Sometimes, short-term CDs with terms of one year or less have the best rates; other times, longer-term CDs win out. Pay attention to what’s available with the best banks each time you want to open a new CD.

When CD ladders are worth it

CD ladders can be a great idea in the following scenarios:

  • You have at least a few thousand dollars you know you won’t need right away.
  • You already have an emergency fund.
  • You like the idea of long-term CDs but aren’t ready to commit all your extra cash to one.
  • You want to collect interest payments.
  • You think CD rates are going to go up.

When they’re not

  • You have cash you want to save now but might change your mind about how to invest it.
  • You’re looking for a place to keep your emergency fund.
  • You need the flexibility to add or remove money at any time.
  • You can’t find one bank with enough CDs you like to build a ladder.

Alternatives to consider if a CD ladder isn’t right for you

Don’t think of CDs as a substitute for any other type of account. They aren’t as flexible as savings accounts, and they don’t offer the level of returns you might get with higher-risk forms of investing, but they can provide a safe source of passive earnings you can predict. If you don’t think a CD ladder would work for you, consider these alternatives.

High-yield savings accounts

If saving is a priority for you but you’re not in a place to fully commit a chunk of money, high-yield savings accounts (HYSAs) might be your best bet. Like CDs, these include FDIC insurance coverage and are very safe. They also help you resist the temptation to spend your savings by restricting the number of times you can transact in a given month (often six). The best savings rates can be competitive with CD rates, but they’re variable rather than fixed.

The decision between CDs and savings accounts comes down to how long you want to save and whether you’re comfortable with locking up your money and throwing away the key.

Money market accounts

If a savings account sounds just a little too restrictive, you can consider a money market account (MMA). MMAs offer similar rates as high-yield savings accounts, often with the added bonus of providing cash access through checkbooks and/or debit cards (which most savings accounts don’t include). This is what I’d recommend for you if you need the option to spend your savings right away like you might with an emergency fund. Money market accounts and CDs are pretty different, with the only similarity being the potential for high rates.

Dividend stocks

If you like that CDs can offer interest payments, but you’re comfortable taking on a little more risk for the potential of a higher reward, stocks that pay dividends may be right for you. These offer regular earnings like a CD ladder could, but the amount you receive can change depending on what the stocks are worth.

FAQs

Do CD ladders make sense?

Whether a CD ladder makes sense depends on your individual situation. CD ladders work best when interest rates are good and for large amounts of money distributed across all of the CDs. APYs, in general, have been pretty low over the past few years, but they change all the time. At a time where the rates are high, setting up a CD ladder can lock your money into earning on those higher rates even if they dip during your terms.

Is a CD worth the investment?

That depends on what you want to get out of your investment. CDs are generally considered safer investments than investing in the stock market, especially when it’s volatile. You may not get as much of a return on a CD investment as you would with a stock purchase, but you can usually count on not losing any money when you open a CD. CDs work best as part of a longer-term diversified savings strategy.

Is it better to have one CD or multiple?

That depends on what you want out of your CD. If you’re looking to earn interest over a long period of time, you have a substantial amount of money to invest, and would like some flexibility to take advantage of better rates, having multiple CDs in a ladder strategy could be a good idea. If you don’t have a large amount to keep in a CD or don’t want to keep your money tied up for more than a year, a single 12-month CD might be a good fit. It’s really up to you.

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Bottom line

CD ladders are a safe way to earn a higher rate of return on your savings and keep your cash close. CD ladders work best when APYs are higher than savings rates, and you have at least a few thousand dollars to spread across multiple accounts. This strategy is also more of a long-term investment, but don’t expect to see the high returns that can come with riskier investments such as stock trading.

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