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Should You Build a CD Ladder?

And what is a CD ladder, anyway?

Build a CD Ladder...Should you?


Find out if a CD ladder is a smart investment strategy for you.

Investors who want to protect their money often look to bank certificates of deposit. CDs usually pay higher interest rates than bank savings accounts or money market mutual funds, but the trade-off is that you have to lock up your money for a specified period. Redeem a CD before it matures and you'll usually pay a penalty.

The other problem with CDs is that to get the best rates you have to lock up your money for an even longer amount of time. That's because banks, in most cases, pay higher rates on, say, five-year CDs than on six-month CDs. So if interest rates rise, you could be stuck in a long-term CD for years while you watch rates on new CDs begin to surpass yours.

A solution to this dilemma is a CD ladder. A CD ladder lets you keep money invested in CDs paying the best interest rates, but still have some money maturing regularly to reinvest at new interest rates.

To build a CD ladder, start by investing equal amounts in CDs maturing at different lengths of time, from short term to long term. As each CD matures, you reinvest that money in a new long-term CD.

Say, for example, you have $25,000 that you want to keep safe at a good return. To build a ladder, you could invest $5,000 each in a one-year CD, a two-year CD, a three-year CD, a four-year CD and five-year CD. Each year, when a CD matures, you reinvest the amount into a new five-year CD. So eventually all your money is invested in five-year CDs and you have one maturing every year that you can reinvest in another five-year CD.

Why not simply invest all the money into a long-term CD at once? Two reasons. First, you may want to have money coming due regularly so that if you need some you don't have to pay a penalty to get it. And second, if interest rates rise you won't have money available soon to invest in new higher rates.

Financial advisers say CD ladders are perfect for someone who is conservative with investments or who just needs a spot for the conservative portion of a diversified investment portfolio. "I'll use these, for example, for a widow who has not been the decision-maker in the financial sphere and is conservative," says Kimberly Foss, president of Empyrion Wealth Management in Sacramento, Calif.

To set up a ladder:

  • Check to make sure the bank is insured by the Federal Deposit Insurance Corp. That way you'll know your money is safe.
  • Check the CD rates at credit unions, if any are available to you. Many pay rates as good as or better than local banks. But make sure it is federally insured by the National Credit Union Administration.
  • Don't overlook online-only banks. These banks often offer higher CD rates because they don't have the overhead costs of operating brick-and-mortar branches.
  • Check to see if a bank offers "bump-up" or "step-up" CDs. These CDs let you switch to a new rate being offered by the bank during the life of your CD — penalty free. That's a valuable perk if interest rates rise between the time you buy a CD and when it matures.
  • Take note of any minimum deposit requirements as well as the interest rate, says David Gutzke, a senior vice president at U.S. Bank's Private Client Reserve division in Minneapolis. Also, note the difference between a CD's annual percentage rate (APR), which is the stated interest rate on a CD, and annual percentage yield (APY), which is that rate compounded over the life of the CD. For example, say you invest $1,000 in a two-year CD that compounds annually, and the APR is 2 percent. You will earn $20 the first year, and the second year you will earn that 2 percent on $1,020, not $1,000. That means the APY will be higher than 2 percent. The more frequently the interest is compounded, say weekly versus monthly or annually, the greater the APY.
  • Become familiar with the bank's early withdrawal penalties. In most cases the penalty is a portion of the interest you had earned, not a portion of your original investment. Keep money that you need to have immediate access to in a savings account so you don't have to worry about early withdrawal penalties.
  • Consider "jumbo CDs" if you're a high roller. Jumbos pay higher interest rates, but the minimum investment is usually $100,000.

You can shop for banks and bank CDs by visiting websites like, and