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A CD ladder allows savers to combine the benefits of a standard CD account (such as low risk and high returns) with regular access to funds that would otherwise be locked away. This article will explain what CD ladders are, how they work, and the pros and cons of this saving method.

What Is a CD ladder account?

A CD ladder is a savings strategy in which multiple CD accounts are opened with staggered maturity dates. CD accounts often have high interest rates compared to typical savings accounts, but to get these rates, the investment must be locked away for an agreed-upon time.

By splitting the investment across multiple, smaller CD accounts, it is possible to benefit from higher rates while having regular access to some of the funds as they mature. When the first CD account matures, you have two options – take the money out or reinvest in a new CD. By reinvesting into a new 'rung' of the CD ladder, the process will continue to provide opportunities to take a portion of the funds out if needed while earning interest on the remainder.

As CD ladders can be extended for as long as you like, they can be used for anything from short-term savings to retirement funds.

How to ladder CDs

If you're interested in laddering CD accounts, here's what you need to do:

  1. Divide your investment into equal amounts
  2. Create multiple CD accounts with staggered maturity dates (e.g., 1 year, 2 years, 3 years, etc.).
  3. As each account matures, you can use that money or reinvest it into another CD account, potentially with improved terms.

This approach means that a portion of your investment is always close to maturity and can be accessed without penalty, increasing your liquidity and allowing you to benefit from longer-term savings rates.

How does a CD ladder work? An example

In this example, there is $10,000 to invest. Rather than adding this to a single 5-year CD account, the investor could create a CD ladder by splitting the money into five equal CDs of $2,000 each, staggered by a year:

  • 1x 1-year CD worth $2,000
  • 1x 2-year CD worth $2,000
  • 1x 3-year CD worth $2,000
  • 1x 4-year CD worth $2,000
  • 1x 5-year CD worth $2,000

Rather than having the entire amount locked away for five years, 20% of the initial $10,000 will mature each year, providing access to funds if needed. If they aren't required, the initial $2,000, plus interest, can be reinvested in a new 5-year CD account to continue the annual maturity cycle.

Remember to only remove funds when the CD has matured, as there are often early withdrawal penalties for withdrawing funds outside the maturity window.

Advantages and Disadvantages of CD ladders

No savings account or method is suitable for everyone, and it is important to find an account that is right for you. Review the advantages and disadvantages of CD ladders below:

CD ladder advantages

Some of the advantages of setting up a CD ladder include:

  • Access to funds – establishing a CD ladder will mean that a portion of your investment will become available at consistent intervals, depending on the duration of your ladder's terms.
  • Reduced interest rate risks – Locking money away for an extended period on a set rate increases certainty, but if interest rates improve during the term, your savings will not benefit from the increase. By establishing a ladder, you will have the flexibility to open new CD accounts at a higher rate.
  • Standard CD account benefits – Besides increased flexibility and access, you will enjoy the security and benefits of traditional CD accounts – fixed terms, Federal Deposit Insurance Corporation (FDIC) insurance, and higher rates than typical savings accounts.

CD ladder disadvantages

Disadvantages of putting your money into a CD ladder include:

  • More complicated to manage – Having multiple accounts rather than one can make account management more complex. CD accounts generally have a short maturity window of 1-2 weeks when funds can be withdrawn without penalty before the account automatically renews with the same terms.
  • No guarantee of benefiting from inflation – While a CD ladder provides more chances to move to improved rates, this is no guarantee that interest rates will continue to rise. This could also mean reinvesting funds from matured CDs at lower rates.
  • Other methods provide higher returns – For those who are less risk-averse, other investments, like stocks and bonds, have the potential to generate higher returns than a CD ladder.

Alternative CD ladder strategies

CD laddering provides broad control over your investments as every element (rates, duration, number of CD accounts, investment amounts) can be decided at the beginning and revised regularly as each account matures. A standard CD ladder is split evenly to ensure consistency and clarity, but investors who want to be more hands-on may want closer control to react to changes in interest rates. The best way for you to ladder CDs is the one that best aligns with your circumstances and goals.

Uneven splits

The split could be based on duration or financial opportunity - using shorter CDs when rates trend upwards to improve your fixed rate or longer terms when rates are going down to get the most from your fixed rate or to benefit from special rates.

However, even splits remain the safest option for steady growth.

Mini CD ladders

For those who are only requiring short-term savings, creating a mini CD ladder could be the best option. The structure of a mini CD ladder is the same as a standard ladder but with short terms of less than a year. This approach could allow your accounts to mature as frequently as monthly or every three months.

While mini CD ladders can offer short-term stability, rates and returns will be lower due to the short time the funds are locked in.

First Merchants' CD comparison calculator can help you compare different CD account types and choose the best options for building your CD ladder.

Start your CD ladder today

12- or 24-month CD accounts can take just minutes to open. For more information about opening your CD accounts and starting a CD ladder with First Merchants, call us at 1.800.205.3464 or contact us.

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