Best bank CD ladder – is there one?

Have you been looking for the best bank CD ladder? Or maybe you have heard about CDs or Certificates of Deposit and laddering but you’re not sure exactly what it is.

What is a CD ladder?

CD laddering means that instead of investing a whole bundle of money into one single CD with a single expiration date, you spread your funds over a number of CDs with different expiration dates extending into the future.

One of the main drawbacks of CDs is that your money is locked up until expiration. Yes, you can cash them in early but then you will pay a penalty. The easiest way to understand a CD ladder is to take a look at an example.

CD ladder flat

A lump-sum

Let’s imagine that you just received a lump sum and let’s say it was a reasonably nice sized lump sum of $50,000.

Let’s also imagine that you already have other investments and your prime objective for this $50,000 is to maintain its value over the next 5 years.

One more objective is that we want at least some of this $50,000 to be available to us just in case our plans change and we need to access some of it sooner than the end of the 5-year period.

A simple way to do this would be to buy five CDs. Each for $10,000, one with a 1-year term, another with a 2-year term, one with 3-year, one 4-year, and one 5-year term CD.

Then we would be able to decide what to do at the end of each year. If our aim is still to have the whole $50,000 available at the end of the original 5-year period, then at the end of the first year we could decide to buy a CD with a 4-year term either for the $10,000 or for the $10,000 plus the dividends and interest.

A more usual thing to do would be to roll the CDs for the long term as that would usually give a better rate of return. This would also be the more usual thing to do if we are looking for the CDs to provide an income stream.

So after we have bought our first set of CDs with 1-year, 2-year, 3-year, 4-year, and 5-years terms, then at the end of each year we would buy a new CD with a 5-year term.

When is it good to ladder your CDs?

Laddering your CDs sets you up to have access to some of your funds on a regular basis. This is preferable if there is a chance that you will need to use some of the principal sooner than anticipated as you will avoid early termination penalties.

Once you have set up your ladder you will also be able to lock in usually higher rates of return because whenever you reinvest it will be in the longer-term CDs, typically with a 5-year term.

All of this makes some basic assumptions.

Firstly that while you may have some uncertainties over the possible need to access your funds at some unknown time in the future. So the first assumption is that your financial situation is more or less stable.

The second assumption is that interest rates are higher on long-term deposits and lower on short-term deposits. This is the usual state of affairs and is referred to as the upward sloping yield curve. The yield curve is usually used to compare short-term government bonds or T-bills with long-term government bonds. Nevertheless, the same yield curve is reflected in the rates available for CDs with different maturity terms.

Currently, this is what the yield curve looks like as it is usually displayed plotting the maturities of typical CDs along the horizontal axis.

US Treasuries yield curve March 2021

1)Data source: US Treasury Department, all charts by Bad Investment Advice

And here is what the yield curve looks like when we plot the maturities to scale.

US Treasuries yield curve to scale March 2021

I think this is more what we would expect to see. I should point out that both of these curves show the yield curve how it is most of the time.

You may have heard of those strange times when the yield curve is inverted. That is which short-term interest rates are higher than long-term interest rates. In such cases, the curve slopes down to the right rather than up to the right.

What causes an inverted yield curve

Bond prices respond to market demand and supply. An inverted yield curve tends to happen when demand for long-term Treasury bonds increases pushing prices up and hence yields down. One factor can be that investors are seeking long-term Treasuries as a store of value when they consider that equities are less likely to appreciate as market sentiment suggests they are currently over-valued.

This is a bit of an aside here, but inverted yield curves tend to foretell the beginning of a recession.

Advantages of laddering

There are two principal advantages of laddering.

Firstly as we already noted, you will have access to some of your funds on a periodic basis so you can decide what to do at regular junctures.

Another big advantage is that you have the chance to benefit from rising interest rates. Essentially you are able to lock in attractive rates as they may become available.

When is it not good to ladder your CDs?

There are going to be times when laddering your CDs is not so advantageous.

No surprise here, if the reverse of the conditions we considered above as being advantageous, apply, then laddering CDs is probably not for you.

The other consideration is that if long-term rates are very attractive but you force yourself to buy CDs with a shorter maturity than you otherwise would, just to construct a ladder, then you will likely be foregoing some benefit of the more attractive longer-term rates.

Early withdrawal penalties

Just so we know what we are talking about here, early withdrawal penalties are usually imposed in terms of lost days of interest. Here would be some examples of typical early withdrawal penalties.

  • for a CD term less than 12 months – you lose 90 days interest for early withdrawal,
  • for a CD term 1 to 5 years – you lose 270 days interest for early withdrawal,
  • for a CD term 5 years or more – you lose 365 days interest for early withdrawal

Then there are CDs that have no early withdrawal penalty. They are imaginatively called no-penalty CDs.

Where can you buy CDs?

Your bank will sell you CDs. If you have an account with a regular broker they will also sell you CDs and you may well find that a broker offers a more extensive range of CDs than does a regular retail bank.

If you want to open an account with a broker, this article compares some of the main brokers operating in the US today.   If you are opening an account with a broker with the intention of buying CDs, make sure that the broker you choose offers a wide range of CDs.

Questions and answers

Q. What is a CD?

A. A CD is a Certificate of Deposit. CDs are offered by banks and other financial institutions to retail customers like you and me. When you buy a CD you are locking up your money for a period of time called the term. In return, the bank pays you interest either periodically during the term or at the end when the CD matures and your deposit is returned to you.

So each CD has a term to maturity and an interest rate that it pays. There may be other attributes such as variable rates, reduced or no withdrawal penalties, and other features offered.

Q. Are CDs safe?

A. CDs are insured by the Federal Deposit Insurance Corporation or FDIC usually to the amount of $250,000. If you are going to buy CDs make sure they are covered by the FDIC. FDIC insurance usually covers each depositor with an institution up to the amount of $250,000.

So if you already have $250,000 sitting on a savings account and you want to buy a CD with more money, it might make sense to buy the CD from somewhere other than where you have your savings account.

This article explains the Federal Deposit Insurance Corporation and other institutions providing deposit insurance.

Q. What causes CD rates to rise?

A. Banks and other institutions issuing CDs are competing with other institutions for your money. So to stay competitive banks will likely raise the rates they offer on CDs if the rates on government Treasury bonds increase. It all comes down to competition and supply and demand.

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The AAII is a nonprofit organization, dedicated to the financial education of its members. Your membership of the AAII will give you access to courses and resources on stock investing, financial planning, and how to manage your retirement finances.

Single-page summary

Here is a single-page PDF summary of the best bank CD ladder.

Best bank CD ladder

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1 Data source: US Treasury Department, all charts by Bad Investment Advice



  1. The thing I like the most about CD ladder is that it can help you build a predictable investment return. It also gives you the ability to earn better returns than you would on a single short-term CD, as well as the ability to access a portion of your CD savings each year. That in my book is awesome! The tradeoff is you could risk losing to inflation in the long term. So we must be aware!

    • Hi Paola, thanks for the comment. I think you have summed it up very well. Best regards, Andy

  2. I never even thought about laddering what a lesson, love it I have learned a lot because I’m from a very poor family after my father lost his life in a store robbery I never got the pleasure of a CD and I don’t even know if he had any plans for me to have one but I assure you after reading you’re content I’m very knowledgable on the fact of CDs and Laddering.

    Thank You 

    Bill Wright 

    • Hi Bill and thanks for the very positive feedback. I am glad you found the article interesting and I hope useful. I am deeply sorry to hear of your tragic loss. My sincere condolences to you and your family. Andy

  3. Thanks for sharing,  I had never heard of a CD Ladder before reading this article.  I definitely wouldn’t want my money locked up until expiration, in case an emergency happened and I needed access to it.  A ladder sounds like just the remedy.  It’s a really cool concept that you can pull the money OR pool it with the next “rung” to double that one and so on down the line.  

    • Hi and thanks for the positive comment. I am glad you found the article informative. Best regards, Andy

  4. It was so interesting to read about CD laddering, although I was aware of buying term deposits I had never thought about spreading my deposits over a few years. Now that you have explained how it can increase the return and make cash available if needed as they mature I think it is a brilliant idea. Another aspect I really like is that as they mature if you don’t need the money you can then buy a longer-term CD to max out the interest and that you can keep doing this over and over.

    A brilliant idea and well explained. How long can you get a CD for? More than 5 years? Is this a good idea?

    • Hi and thanks for the comment. I agree that CD laddering is definitely the way to go if you are buying CDs to set up an income stream. I chose to show an example of a 5-year term CD ladder because, in my opinion, this is the sweet spot as regards long-term returns. You can get 10-year CDs. But if you think about it, buying a 10-year CD at a fixed rate is locking you in to a rate of return for a very long time. You would effectively be saying that interest rates are unlikely to change over the next 10 years to a large enough degree that I would want to reconsider this investment. If you are willing to take a very sanguine historical view of interest rates and economic cycles then you may be willing to make this gamble. Were I to take that view of where we are now, I think it is far more likely that we will see higher inflation and higher interest rates over the next 10 year period than we have now. You could also buy CDs with an adjustable rate of return, but you are going to pay for that feature. As I say, I think in today’s economic environment, 5-years is about as far out as I would feel comfortable going with a CD. But these are all decisions we should be making for ourselves. Thanks again for the comment and question. Best regards, Andy

  5. Hi Andy,

    Before reading your article, I knew nothing about laddering CDs. The information gave me a better understanding of another item to add to my investment portfolio. When you mention the most significant benefit from laddering CDs is the chance of rising interest rates. And, Ultimately locking in attractive rates, I was sold.

    Does laddering CD maximize returns while they minimize risk?

    • Hi Sharon and thanks for the comment. I think laddering CDs is probably the best approach to adopt most of the time for most people who are investing in CDs. There is still a judgment call that you have to make on what term to use, whether 5 years, 7 years or even less and that will depend on the volatility of the markets and what market sentiment is about where interest rates are going. So I don’t think it is possible to say that this is always going to maximize returns while minimizing risks. That depends on the situation. Though it does seem like the best approach for most people using CDs to create a predictable income stream, most of the time.  Best regards, Andy

  6. Hi there! Good job! personally i invest my dollars using CD ladder and thus far there has been no regrets, Creating a CD ladder can seem difficult and not worth it to the average consumer; but if you’re serious about maximizing your dollars , i recommend you invest using CD ladder, It is a good investment if you’re certain you don’t need the money until the CDs have matured. Thanks for sharing!

    • Hi and thanks for leaving this comment. It is very reassuring to hear from someone who actually uses CD ladders and confirms their validity! Thanks again and best regards, Andy

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