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What is a CD ladder?

Check out our informative guide to CD ladders, how they work and how you can take advantage of this flexible savings strategy.

Updated

12 min. read

Life is unpredictable, but having a flexible savings strategy can help: Enter the CD ladder – a method for saving money that lets you build wealth over time, while having access to your money on a predictable schedule.

How do CD ladders work?

A CD, or a Certificate of Deposit, is a type of savings account that holds a fixed amount of money for a fixed period of time. It’s considered one of the safest savings options^{footnote 11}, according to the U.S. Securities and Exchange Commission.

If you have a CD, you can use a particular strategy called CD laddering to maximize your savings. With CD laddering, you invest in a combination of short- and long-term CDs. When the shorter-term CDs mature, you can access funds without a penalty, while your longer-term CDs continue to earn interest. (Note: If you need a refresher on CD terminology, visit our glossary.)

This approach typically offers more flexibility than traditional CD investing. For instance, you might be attracted to the higher interest rate of a long-term CD, but don't want to stash away all of your cash for that long. A CD ladder approach can help savers build wealth with the added benefit of being able to access their money as each of the CDs in the ladder matures, beginning with the earliest.

Using a CD laddering strategy, you set up multiple CDs so they mature at staggered intervals. By investing in CDs of various term lengths, you may get the benefits of higher interest rates, while also seeing a return on your shorter-term CDs sooner.

When the term is up, you get the money you originally invested plus any interest it earned. The catch? When you purchase a CD, you agree to keep your money in the account until the end of the set term, called the maturity date. If you withdraw your cash before the maturity date, you could face stiff penalties. Although market rates may rise or fall, your money will earn a fixed interest rate for the term of the CD. Ahead of a falling rate market, it can be advantageous to lock in your CD while rates are still high.

“CDs typically are less risky than other types of investments.”

Things to consider with a CD ladder strategy

If you’re interested in creating a CD ladder, you can start with choosing how many CDs you want to open, and the length of time (known as the term) you’d like to invest in each one.

Other factors to consider before creating your CD ladder include:

Liquidity – think about how much cash you want to keep fairly liquid and how much you can afford to put away, leaving it untouched for longer
Interest rates – what rate is your bank giving you? For information on CD rates at BMO, visit our CD page
Market trends – CDs are a great way to combat market volatility by locking in a competitive rate for a set term
Taxes – interest earned on CDs is considered taxable income^{footnote 22}

Pros and cons of CD ladders

CDs typically are less risky than other types of investments, while warranting a higher return than a simple savings account. But as with many banking products, there are pros and cons.

Pros of CD ladders

CDs tend to have a higher interest rate than most traditional savings accounts.
CDs are considered a safe investment, as they are insured by the Federal Deposit Insurance Corporation (FDIC).
Staggered CDs provide a steady, predictable income stream.

Cons of CD ladders

CD interest rates don’t always keep up with inflation.
You may pay a penalty if you cash in a CD before maturity.
You’ll have to keep track of multiple maturity dates.

How to build a CD ladder

So now that you know all about CD ladders, how do you actually build one? The key to a successful CD ladder is to have a mix of shorter-term CDs, medium-term CDs and longer-term CDs. Here are three steps to build one:

Step 1: Open multiple CDs

Split your money between CDs of varying term lengths. You can divide your investments evenly (like $1,000 in each CD) or mix it up.

Step 2: Reinvest your funds

As the term of each CD ends, you can access your cash if you need it, or you can take those funds and reinvest them to keep the ladder going. People often choose to reinvest their funds into higher-interest and longer-term CDs, such as a five-year CD.

Step 3: Reap your rewards

The end result of a CD ladder is a staggered series of investments that lets you take advantage of high-interest CDs, while still having some flexibility to access your funds as each CD term ends.

After your first term is up (in this case, your one-year CD), you’d reinvest the cash from that CD into a CD with the highest rate available in the market at that time, which is typically the CD with the longest term at the top of your ladder (in this case, your five-year CD). At the end of each term, you may be able to re-invest that cash into the CD with the highest available rate. You’ll eventually reach a point where your ladder is made up entirely of long-term CDs, which may earn the most interest.

Alternative CD structures

In addition to the standard CD ladder structure we’ve explored, there are also a couple of alternative structures you may want to consider, the CD barbell and the CD bullet. Here’s an explanation based on information from NerdWallet.

Table explains the difference between a C D barbell and a C D bullet. Column 1 provides details on the barbell structure. Column 2 provides details on the bullet structure.
CD Barbell	CD Bullet
Splits your investment between short- and long-term CDs, but no mid-range CDs	Splits your investment into CDs that reach maturity around the same time
Lets you have more access to funds before locking into a long-term CD	Lets you build up a large amount of savings that can be withdrawn at the same time
More risky than a CD ladder, but not as risky as a CD bullet	Higher risk because there’s no diversification
Reinvest once short-term CDs reach maturity, either in new short- or long-term CDs	No reinvesting

How to purchase CDs

Certificates of Deposit are available through banks, though rates and early withdrawal penalties vary depending on where you purchase them from. If you want to set up a CD ladder, all you need to do is purchase several CDs of varying terms, then continue to reinvest the CDs at the bottom of your ladder as each term ends.

The bottom line

All things considered, a Certificate of Deposit is a safe, flexible savings account. Using the strategy of CD laddering lets you maximize that flexibility. You can create a CD ladder in a few easy steps, but we’re always here if you need help. For more information, check out our frequently asked questions about CD ladders.

CD ladder FAQs

In this section, you’ll find answers to some of the most common questions about CD ladders.

Can I customize the length and terms of a CD ladder?

Yes. With CD laddering you invest in a combination of short- and long-term CDs. When the shorter-term CDs mature, you can access funds without a penalty, while your longer-term CDs continue to earn interest.

What happens when a CD matures in a ladder?

You can either close your CD and take your cash and interest or roll the CD into a new CD term to keep earning interest.

Can I withdraw funds from a CD before it matures in the ladder?

Yes, but early withdrawal penalties may apply. For questions about BMO CDs, contact your banker or call us at 1-800-546-6101 or visit our website.

What are mini-CD ladders?

A mini-CD ladder is a CD ladder with shorter terms for each CD.

What is the advantage of a CD ladder when interest rates are going up?

In a rising rate environment, you’re able to choose from a variety of terms and build your preferred CD ladder based on the best available interest rate and term length with which you’re comfortable. CDs with longer terms will likely have higher rates than CDs with shorter terms. A traditional CD ladder strategy lets you earn higher rates in your longer-term CDs while keeping some of your funds in shorter-term CDs (with lower rates) to cover expenses in the short term.

What is the advantage of a CD ladder when interest rates are going down?

In a falling rate environment, you’ll have peace of mind knowing that your rates are locked and your earnings are guaranteed for the terms you chose. CDs with longer terms will likely have lower rates than CDs with shorter terms. However, there could be an advantage to locking in a lower rate for a longer term. As rates fall, your CD may still have a higher interest rate than the current market CD rates.

Glossary
CD: A CD or certificate of deposit is a type of savings account that holds a fixed amount of money for a fixed period of time.
CD barbell: A CD barbell is a CD structure thatsplits your investment between short- and long-term CDs, but no mid-range CDs. CD bullet: A CD bullet is a CD structure thatsplits your investment into CDs that reach maturity around the same time.
CD ladder: A CD ladder is a CD structure that splitsyour investment in a combination of short- and long-term CDs that reach maturity at staggered intervals.
Maturity: Maturity refers to when a CD has come to the end of its term. A CD reaches maturity when it hits the maturity date, meaning the date that the agreed-upon term ends.
Mini-CD ladder: A mini-CD ladder is a CD ladder with shorter terms for each CD.
Term: The length of a CD is called the term and you can open CDs with various terms, anywhere from one month to several years. Terms have start dates and maturity dates (end dates).