How to Build a CD Ladder Step by Step
To build a certificate of deposit (CD) ladder, split your money into equal parts and open CDs with staggered terms, such as 1, 2, 3, 4 and 5 years. Each time the shortest CD matures, reinvest it in a new 5-year CD.
That way, one rung comes due every year. At The Modern Wallet, we start every savings guide with the arithmetic, so our worked example uses $10,000 split into five $2,000 rungs.
How to Build a CD Ladder Step by Step
Building a CD ladder takes five steps, and the last step repeats every year for as long as you keep the ladder.
- Decide the total. Use only money you can leave untouched until each CD ends, because the Consumer Financial Protection Bureau (CFPB) says taking money out of a CD early means paying a penalty to the bank.
- Pick the number of rungs. Five rungs with terms of 1 to 5 years put one CD on a maturity date every year.
- Split the total equally. A $10,000 total across five rungs is $2,000 per CD.
- Open one CD for each term: 1 year, 2 years, 3 years, 4 years and 5 years. Compare every offer on the term, the interest rate and the early-withdrawal penalty, the three points the CFPB tells savers to weigh.
- Roll each maturing CD into a new longest-term CD. When the 1-year CD comes due, move its money into a new 5-year CD, then do the same with the 2-year CD a year later.
Once every original rung has rolled over, each CD in the ladder is a 5-year CD, and one of them matures every year. That schedule gives you access to one slice of the money each year while the rest sits in longer terms.
A CD is a savings product from a bank or credit union, and you agree to leave the money in for a set term. The ladder applies that agreement five times with five different end dates, so no single date controls all of your money.
Worked CD Ladder Example Using $10,000
A $10,000 CD ladder split into five $2,000 rungs earns $420 in its first year at hypothetical rates of 4.00% to 4.40%. That works out to a blended 4.20% on the full $10,000.
These rates are examples and are not current offers from any bank. Each bank sets its own rates, and those rates change.
- 1-year CD at 4.00%: $80 of first-year interest
- 2-year CD at 4.10%: $82
- 3-year CD at 4.20%: $84
- 4-year CD at 4.30%: $86
- 5-year CD at 4.40%: $88
Each figure is the rate times $2,000, as simple interest that ignores compounding. The five rungs add up to $420, which is a blended 4.20% on $10,000. To see how compounding changes one rung over its full term, enter its rate and term in the compound interest calculator.
After year one, the 1-year rung matures and returns its $2,000 plus $80 of interest. The example reinvests that money in a new 5-year CD at whatever 5-year rate is on offer at that point. A year later the original 2-year rung matures and gets the same treatment, so one rung keeps coming due every year.
The blended 4.20% sits below the 4.40% example rate on the 5-year CD. You give up that gap in exchange for $2,000 coming due every year.
What Happens When a Rung Matures
When a rung matures, its term has ended, so you can move the money without the penalty that applies to early withdrawals. In a ladder, that money and its interest go into a new CD at your longest term, which is 5 years in the example. Put each maturity date in your calendar so you pick the next CD before the date arrives.
You can also take a maturing rung as cash if you need it that year. The ladder then runs with one fewer rung, and you can add the slot back later by opening a new longest-term CD.
A callable CD can be ended by the bank before maturity, according to the CFPB, so a callable rung may not last its full term. If that happens, the rung comes back to you off schedule and you have to reinvest it sooner than planned. If you want every rung to last its whole term, open CDs that are not callable.
What a CD Ladder Trades Off
A CD ladder trades the option of locking the whole total into one long-term CD for access to part of your money every year. In the hypothetical example, the ladder's blended first-year rate is 4.20%, while the 5-year rung alone pays 4.40%. One 5-year CD would lock all $10,000 until the end of year five, and the ladder frees $2,000 every year instead.
Rates are set by each bank and change, and a ladder reinvests only the rung that matures each year. If 5-year offers rise, the ladder reaches them one $2,000 rung at a time. If 5-year offers fall, only that year's $2,000 rung is reinvested at the lower offer.
A single 5-year CD takes the 5-year rate offered on the day you open it, for the whole total. A ladder spreads the same $10,000 across five reinvestment dates.
Early-Withdrawal Penalties and How to Compare Offers
Early-withdrawal penalties on CDs have no standard amount, because penalties vary by bank and by term. Federal rules require the bank to disclose whether a penalty applies, how it is calculated and when it is assessed. Examples of penalty forms include a flat amount or a set number of days' interest.
Use that disclosure to compare offers before you open any rung. The CFPB tells savers to compare CD offers on three things: the term, the interest rate and the early-withdrawal penalty. A higher rate paired with a larger penalty can be the wrong pick for a rung you might need to break.
Because penalties can differ by term, the 5-year CD at one bank may carry a different penalty from the 1-year CD at that same bank. Compare the penalty on every term in your ladder.
Deposit Insurance When Rungs Sit at Several Banks
CDs at a bank insured by the Federal Deposit Insurance Corporation (FDIC) are covered up to $250,000 per depositor, per insured bank, for each account ownership category. Credit union CDs are insured by the National Credit Union Administration (NCUA).
Deposits in the same ownership category at one bank are added together. All five rungs at one bank, plus any savings you hold there in the same category, count toward a single $250,000 limit. Deposits at different FDIC-insured banks are insured separately, so a large ladder can place rungs at different banks to keep each bank's total under the limit.
The $10,000 example sits well below $250,000 at one bank. The FDIC's explanation of ownership categories and coverage shows how each category is counted.
Taxes on CD Interest
Interest on CDs is taxable interest, and the Internal Revenue Service (IRS) treats interest generally as ordinary income. Payers send Form 1099-INT when they pay you $10 or more of interest. You report all of your interest even if no form arrives.
In a ladder, every rung produces interest you report, including rungs at banks that send you no form. If you hold rungs at several banks, each bank is a separate payer.
If you break a rung early, IRS Publication 550 says you report the total interest paid or credited without subtracting the penalty. The penalty is handled separately on the return, and Publication 550 sets out how. For how savings and CD interest shows up at tax time, see our guide on whether savings and CD interest is taxable.
When a Ladder Is the Wrong Tool
A CD ladder is the wrong tool for money you need on a known date and for an emergency fund. A ladder releases only one rung per year, so it does not line up with a single payment date. For a known date, pick one CD whose term ends by that date, or keep the money in savings.
An emergency fund fits a savings account better, because taking money out of a CD early means paying a penalty and an emergency does not wait for a maturity date. Our high-yield savings vs CD comparison lays out that choice, and the best high-yield savings accounts roundup lists accounts to compare. To set a target for the fund, use the savings goal calculator.
If you are weighing other places for money you can set aside, compare the ladder with the options in CD vs money market and CD vs Treasury bill. To project a savings balance alongside the ladder, run the numbers in the high-yield savings calculator.
A Decision Rule for Whether a Ladder Is Worth It
Build a CD ladder if you can leave the whole total alone until the 5-year rung ends and you want part of it back each year. If either condition fails, a savings account or a single CD fits better.
A ladder does not serve anyone who would need more than one rung's worth of money in a single year, since every extra dollar comes from breaking a rung early and paying a penalty. That saver should keep the near-term money in a savings account and ladder only the rest.
Our answer would change in two cases. If the money has a fixed due date, a ladder is not the right tool. If the longer terms at your bank pay no more than the 1-year CD, the ladder locks money longer for no added rate, and savings or repeated 1-year CDs fit better.
Start by writing down your total, dividing it by five, and comparing the 1-year through 5-year CDs at your bank on term, rate and penalty before you open the first rung of your CD ladder.
Frequently asked questions
What is a CD ladder?
A CD ladder is a set of CDs with staggered terms, such as 1, 2, 3, 4 and 5 years, each holding an equal part of your money. When the shortest CD matures, you reinvest it in a new longest-term CD, so one rung comes due every year. Each CD is a savings product from a bank or credit union that you agree to leave in place for a set term.
Is a CD ladder worth it?
A CD ladder is worth it if you can leave the total alone for the longest term you pick and want part of the money back each year. In the hypothetical $10,000 example, the ladder earns a blended 4.20% in its first year against 4.40% on the 5-year rung, and you accept that gap for $2,000 coming due each year. For an emergency fund or money needed on a set date, a savings account fits better, as our high-yield savings vs CD comparison explains.
What happens when a CD in a ladder matures?
When a CD in a ladder matures, its term has ended and you decide what to do with the money and its interest. To keep the ladder going, reinvest it in a new CD at your longest term, which is 5 years in the example. If you need the cash that year, take it out and run the ladder with one fewer rung.
Can I lose money in a CD ladder?
Yes, if you break a rung early: taking money out of a CD before it matures means paying a penalty to the bank. Penalties vary by bank and term, and federal rules require the bank to disclose how the penalty is calculated and when it is assessed. FDIC insurance covers CDs up to $250,000 per depositor, per insured bank, for each ownership category, and credit union CDs are insured by the NCUA.
How many rungs should a CD ladder have?
A CD ladder should have one rung for each year of the longest term you are willing to lock, so a 5-year top rung means five rungs. That spacing puts one CD on a maturity date every year. Fewer rungs with a shorter top term also give one maturity a year, with less of the money in longer terms.
Sources
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