What Is a CD Ladder and How Do You Build One?

Certificates of deposit are a great option for anyone who wants a low-risk place to grow their savings, but they come with a major drawback: You’ll pay a penalty if you need the money before it reaches maturity date.

Building a  CD ladder gives you more flexibility, helping you ensure earlier access to your funds while taking advantage of competitive interest rates. Read on to learn how a CD ladder works, when it makes sense to build one and what to consider when doing it.

What is a CD ladder?

A CD ladder is a savings strategy that involves opening multiple CDs with different term lengths to diversify your funds. When you build a CD ladder, you divide a lump sum across several CDs with staggered maturity dates. When each CD matures, you can withdraw your funds or roll them into a new CD, potentially at a better rate.

For example, you can build a CD ladder by spreading your money across one-, two-, three-, four- and five-year CDs. When the one-year CD ends, you can roll those funds into a five-year CD knowing you’ll get access to funds from the two-year CD the following year. The idea is simple: You get to take advantage of longterm CD rates, which are typically higher than short-term CD rates, while keeping some money in a CD that matures sooner.

CD ladders can come with a few drawbacks. If you need to withdraw money before a CD matures, you’ll pay an early withdrawal penalty. And rates could go up while your money is locked up in your CDs, meaning that you’ll miss out on the most competitive yields. Plus, if rates fall, it may not be worth continuing the ladder as your CDs expire.

When to build a CD ladder

A CD ladder allows you to partially side-step the inflexible nature of CDs. With this strategy, you can form a schedule to increase your liquidity while continuously investing in CDs that earn higher interest. 

“In general, this is a great strategy because longer-term CDs typically pay more than the shorter-term CDs do,” said Robert Farrington, founder of TheCollegeInvestor.com. But short-term CDs (those one year and less) are getting higher yields than most longer-term CDs right now, based on the banks we track at CNET. That’s because banks know that the Federal Reserve can’t keep rates high forever. When it eventually cuts rates, they don’t want to be locked into paying you more interest.

If you don’t need the money immediately, a CD ladder can help you earn interest toward medium-term goals a few years later, like a down payment on a home or car. A CD ladder gives you access to some of your funds at different times and allows you to capitalize on better interest rates over time. 

CD ladders are not ideal for savings that need to be kept highly liquid, like your emergency fund, which you should keep in a more accessible high-yield savings account. If you ever need money while it’s locked up in a CD, you’ll have to pay a penalty to access it. 

How to build a CD ladder 

The first step to building a CD ladder is to shop around for the best rates. Then, follow these steps.

1. Consider your goals

Before building a CD ladder, think about your financial goals and when you’ll need the money since you’ll have limited access to your funds for a set term.

“When you create a CD ladder, you commit your funds for a specific period in each CD,” said Doug Carey, founder and president of WealthTrace. “If unexpected financial needs arise or you want to take advantage of other investment opportunities, the lack of liquidity can be a drawback.” 

2. Invest in multiple CDs

Start with an initial sum of cash divided between multiple CDs, which mature at different intervals. Depending on your desired timeline, you may choose CDs that mature every six months, every year or longer.

“Plan the duration and timing of your CDs carefully,” said Carey. “Each CD in the ladder should have a different maturity date, allowing you to access a portion of your funds periodically without incurring penalties.” 

For example, if you have $20,000 to invest, you might break it up like this: 

• $4,000 in a one-year CD 
• $4,000 in a two-year CD 
• $4,000 in a three-year CD
• $4,000 in a four-year CD
• $4,000 in a five-year CD

When your first CD matures, you can move the principal deposit (and any interest earned) into a new five-year CD. You’ll repeat this process with the remaining CDs. Here’s what it should look like using the previous example: 

• $4,000 + one year of interest in a five-year CD
• $4,000 + two years of interest in a five-year CD 
• $4,000 + three years of interest in a five-year CD
• $4,000 + four years of interest in a five-year CD
• $4,000 + five years of interest in a five-year CD

3. Reinvest or withdraw at maturity 

As each CD term ends, you can put the money toward a goal or another savings vehicle. Or you can continue adding rungs to your ladder by rolling it into a longer-term CD, like a three- or five-year CD. This lets you build on your initial CD ladder, while still staggering maturity dates and possibly earning the highest interest rate. If you were to reinvest your money in a five-year CD each time a CD matures, like the example above, you would have money coming due every year.

Pros and cons of CD ladders

Should you open a short-term CD ladder?

A short-term CD ladder is the same as a standard one, but the terms are shorter -- typically one year or less. This way, CDs mature sooner, so you’ll have access to your money within a few months, depending on the term. For example, you may build a short-term CD ladder with three-, six-, nine-month and one-year CDs. 

But you could be gambling with interest rates because the rate is only fixed throughout the duration of the term. If rates drop and you decide to renew your short-term CD, you’ll be stuck with the lower rate. It’s also worth noting that the annual percentage yield is the rate you’ll earn for keeping the money in for an entire year. So you’ll earn less if your term is shorter than 12 months.

Building a CD ladder in 2024

If you’re developing a CD ladder strategy with today’s rates, keep in mind that the Federal Reserve is likely to cut rates in September. Since banks typically adjust their APYs alongside the Federal Reserve’s rate moves, that means CD rates will likely drop soon, too.

Since short-term CDs currently have higher APYs than longterm CDs, you might consider building a CD ladder with some shorter-term CDs. Right now, Carey recommends sticking to shorter terms, such as six months and one year, since they offer the highest yield. 

At the same time, you need to be mindful of the potential benefit of locking in a higher rate on a longterm CD, too. For example, some of the most competitive five-year CD rates are hovering at 4% APY right now. If you deposited $5,000 at that rate today, you would earn $849.29 in interest at maturity. If you wait and the rate drops to 3.5% APY, the five-year return shrinks to $737.62.

Correction: An earlier version of this article was assisted by an AI engine and it mischaracterized some aspects of CDs. Those points were all corrected. This version has been substantially updated by a staff writer.

This article includes some material that was previously published on NextAdvisor, a CNET Money sister site that was also owned by Red Ventures and which has merged with CNET Money. It has been edited and updated by CNET Money editors.