How does a CD ladder work? Definition, example, and benefits

Certificates of deposit (CDs) are straightforward, low-risk deposit account products that help you earn predictable interest rates. A CD ladder strategy lets you split money across multiple CDs with staggered terms.

In the ladder model, your money isn’t tied up in a single investment or product. When one of your CDs matures, you gain access to the principal and the accumulated interest. You can then roll your money into a new CD, while your remaining certificates continue to grow.

If you’re an investor who likes to balance flexibility and earnings, a CD ladder could be a helpful approach. Read on to learn how a CD ladder works, the benefits and drawbacks, and how to get started. Plus, you’ll learn about alternative investment options and when they may be a better choice.

How it works: A practical CD ladder example

Understanding how to ladder CDs becomes clearer when you visualize the math. Here’s a practical hypothetical example.

Suppose you have $10,000 split evenly into five CD accounts. You deposit $2,000 into certificates with the following terms:

• 1 year
• 2 years
• 3 years
• 4 years
• 5 years

When the 1-year CD matures, you’ll get your $2,000 principal back and the interest it earned. The next year, when the 2-year CD matures, you’ll get another $2,000 payment. Each rung gives you a predictable income stream while the longer certificates continue to earn at their locked rate.

What are the benefits of a CD ladder?

Some investors prefer to spread their money across a CD ladder instead of putting all their money in one place. Here’s how this method can work.

Steady access to cash

When you put money into one CD, you typically can’t access it until the term ends without facing early withdrawal penalties. This can be a problem if there’s an emergency or you need to make a big purchase. If all of your savings are in one long CD, your money may have restricted or limited access for years.

A ladder can give you steadier access to money because you spread your savings across multiple CDs with different terms. Each time a certificate matures, you have the flexibility to withdraw or reallocate based on your goals.

Reduced risk of locking in poor rates

CDs have locked-in interest rates, which is positive if you don’t want interest rates to fluctuate with the market. But putting all your money into one long CD can backfire when rates rise.

For example, imagine you put all your money into a 10-year CD with a 4% interest rate. If rates jump to 5% the next year, you won’t be able to take advantage of the new higher rate without taking an early withdrawal penalty. Your savings are held in a CD that still has 9 years to maturity.

If you use the CD laddering strategy, your money is rarely locked away in one product for long. You can regularly reallocate savings in CDs with current rates.

Predictable returns

CDs are low-risk products offering predictable interest rates because the rate is fixed for each term. A ladder enhances this stable growth by spreading your money across multiple certificates. You know when each rung will pay. This can work well for conservative investors who want to plan for future needs.

What are the downsides of a CD ladder?

CD ladders can be a savvy, risk-averse strategy, but they aren’t perfect. Here are a few CD drawbacks to consider.

There’s still some liquidity risk

Even when you ladder CDs, there’s still limited flexibility because terms are fixed, and your money will be locked in for that period. Should you urgently need to withdraw money, you won’t be able to without paying a penalty. This creates some risk if you need money before a rung matures.

CDs are taxed normally

Interest from CD accounts is typically taxed as ordinary income in the year it’s earned. The IRS doesn’t offer special tax treatment for standard certificates. If you rely heavily on CD savings, all interest payments will be taxed at your regular rate.

How to build a CD ladder: 5 essential steps

If you think the benefits of a CD ladder strategy outweigh the drawbacks, here’s how to get started.

Decide how much to contribute

Determine the total amount you’d like to contribute to CDs. Make sure you keep enough savings easily available for expenses and other investments. You can split your money evenly or place more in a long-term rung to drive higher interest earnings.

Choose your ladder length

Decide how long you want your ladder to run. A longer period gives you more reallocation cycles which can help you earn more over time. Many savers use a mix of shorter term CDs and long-term options to balance access and growth.

Select CD terms

CD terms range from a few months to over ten years. Decide what combination of CD lengths fit your financial goals. You might use several short-term CDs for quick access to money and one long-term certificate that offers a higher rate. Putting large amounts into longer-term CDs can lead to more growth potential, thanks to accumulated interest.

Open and stagger your CDs

Compare CD rates across banks and credit unions. Look for competitive options that match your ladder plan and offer competitive rates for each term. After making a decision, open each CD and stagger the terms so they mature at different times. This creates the ladder structure and keeps your savings on a steady schedule.

Reallocate as CDs mature

When a CD matures, you can take the money out or reallocate it in another CD. Reallocating allows you to extend your CD ladder for more time and work toward long-term savings goals.

For example, suppose you have a 5-year ladder with CDs that mature one year apart. When the 1-year CD pays out, the ladder has a total of 4 years left. Putting that money into a new 5-year CD replaces the rung that just matured and returns your ladder to its full length.

CD ladder strategies for different goals

CD ladders can support short- and long-term goals like retirement. Here’s how to choose an account that aligns with your goals.

Short-term (conservative) CD ladders

A short-term ladder works well for near-term needs like renovating your home. You can use shorter terms to keep savings accessible while still earning interest.

Long-term (growth-focused) CD ladders

Long-term strategies are smart for future savings. Your money stays allocated longer and has more time to grow and potentially earn higher interest rates. If your CDs compound, your balance can grow steadily because you’re earning on both your original deposit and the interest it has already generated.

You can also think of longer-term strategies as income planning. When CDs mature, you can move the money into a retirement account, like an annuity. These can provide steady payments over a set period or even for life.

Conservative vs. growth-focused ladders

Combine short- and long-term strategies to balance immediate access with future growth. For example, you might purchase 6-month and 1-year CDs for flexibility and place the rest in longer terms to support long-range growth. This strategy can stretch your timeline while still giving you short-term flexibility.

CD ladder vs. other savings options

People often use CD ladders alongside other types of savings methods. The following alternatives might also make good additions to your strategy.

CD ladder vs. money market account

A money market account (MMA) is a savings product that also has checking features, such as debit access or check-writing. Unlike CDs, MMAs don’t lock your money away for a set term, though some banks limit monthly withdrawals. Interest rates for MMAs are typically higher than those found with traditional savings accounts. But rates are variable and can change over time, while CD ladders offer fixed rates and predictable maturity dates.

CD ladder vs. bond ladder

Bonds are debt securities issued by governments, municipalities, and corporations. When you buy one, you lend money to the issuer, and they pay interest over time before returning your principal at the end of the term. Bonds can offer relatively high interest rates, and you can ladder them just as you can CDs. However, they’re not FDIC-insured, which carries some level of risk.

Strategize and save with Gainbridge

CD ladders can be a helpful approach for risk-averse investors who want control over their savings and growth potential. But they’re only one part of a broader savings strategy.

Explore other predictable, low-stress strategies with Gainbridge. Learn about modern, fixed annuities like Traditional Save and Retirement Save and create a predictable future income. Plus, enjoy higher growth potential with no hidden fees or commissions.

This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional. The Gainbridge® digital platform provides informational and educational resources intended only for self-directed purposes. Save Retirement and Save Traditional are annuities issued by Gainbridge Life Insurance Company, a Delaware-domiciled insurance company with its principal office in Zionsville, Indiana and is licensed and authorized to do business in 49 states (all states except New York) and the District of Columbia. Products and/or features may not be available in all states. Guarantees are based on the financial strength and claims paying ability of the issuing insurance company. Please visit gainbridge.com for current rates, full product disclosure and disclaimers and additional information.

‍