Why you Need a CD Ladder and How to Build one

A certificate of deposit (CD) can boost your earnings at the bank, but it requires that you lock your money up for several months or even years to achieve earn the interest.

A CD laddering strategy can help you keep some flexibility, ensure a bit of cash flow, and potentially maximize your earnings. It involves buying multiple CDs with maturity dates at various times in the future.

• Why do you Need a CD Ladder?
• What are the Pros and Cons of a CD Ladder?
• How to Build a CD Ladder
• Comparing CD Ladder to other Savings and Investing Options
• What are CD Interest Rates?
• Best CD rates from top banks

Why do you Need a CD Ladder?

A CD ladder is a strategy of opening several certificates of deposit that mature at staggered intervals. When a CD finishes a term, you can roll those funds into a new, longer CD.

Read Also: What is a CD Ladder (and Should you have one)?

The main benefit for investors here is that they can access funds periodically without paying an early-withdrawal fee.

You might not have to wait for long if you need cash flow from your CD ladder. One of your CDs should mature soon enough—providing liquid cash without penalty—and hopefully you won’t need all your money at once.

A ladder can particularly optimize cash flow in retirement when you can pinpoint how much money you’ll need each year to meet expenses.

You can plan to cash out each CD as it matures yearly to supplement your income in that year rather than reinvest and build again onto the end of the ladder.

Handling Changing Interest Rates

You’re typically stuck with the interest rate that’s available when you buy and invest money in a CD. That works in your favor when rates are high, but seeing rates go up after you’ve locked in a low rate is always unfortunate.

But you’ll continually reinvest over time when you build a CD ladder, so you’ll update your rate periodically.

A CD ladder allows you to avoid making predictions about interest rate movements; wherever rates go, that’s what you’ll start earning.

But if you can predict that rates are about to rise, you might wait to build your ladder or keep maturities on the short end. Likewise, if you know that rates are about to fall, a ladder that skews toward longer maturities might make sense.

Using a CD Ladder as Part of Your Portfolio

A CD ladder can serve as a fixed component of your overall financial plan. As low-risk investments, CD ladders can anchor more volatile investing, particularly when your ladder is at least partially composed of at least one long-term, jumbo CD.

Conventional wisdom tags jumbos at $100,000, but you can purchase them in denominations of $10,000. The returns might not be remarkable compared to your other investments, but they should be steady and safe.

Taking Advantage of Higher Interest Rates

When opening a CD account, getting the best annual percentage yield possible may be one of your top priorities. Every bank and credit union is different when it comes to determining which rates to apply to CDs. But, generally, the longer the CD term, the higher the APY.

Creating a CD ladder allows you to take advantage of higher rates without having to put all of your money into a single CD for a single period of time.

Avoiding Early Withdrawal Penalties

CDs are time deposits, meaning you’re committing to saving money in them for the duration of the maturity period. Withdrawing money from a CD before it matures often triggers a penalty, which typically means forfeiting some or all of the interest you’ve earned so far.

Having a ladder of CDs with maturity dates spaced out can help reduce your odds of triggering an early withdrawal penalty when you need access to cash. If you’ve spaced out CDs every six months, for example, you might simply wait until your next maturity term to make a withdrawal.

Saving for Different Financial Goals

A CD ladder can also be useful when saving for a mix of short- and long-term financial goals.

Say your goals include setting aside money for a vacation and putting money away for a down payment on a home over the next five years. You could use a six-month CD to save for your trip, while putting money toward a home into a three- or five-year CD.

The shorter-term CD means you’ll be able to withdraw the money without penalty when it’s vacation time. The longer-term CD could allow you to earn a higher APY on savings and grow your down payment fund faster.

What are the Pros and Cons of a CD Ladder?

There’s a lot to like about these investment tools, from accessibility to security.

Accessibility: Having relatively frequent, periodic access to your funds allows you to plan your budget. You can also access the money for an emergency (though you’d still have to pay an early withdrawal penalty if the timing’s not right — more on that below).

Higher interest rates: You can generally get higher interest rates than you would on other financial products, like money market accounts.

Low risk: So long as you follow the CD’s terms, you’ll get back your principal, plus whatever interest you’ve earned.

CDs are also considered a low-risk way to go because they’re insured for up to $250,000 by the Federal Deposit Insurance Corporation (for bank products) or the National Credit Union Administration (for credit union products).

But here’s a word of caution when CD laddering at the same institution: Once your CDs are collectively worth more than the $250,000 limit at a single FDIC- or NCUA-insured bank, you’ll lose that protection on the amount that exceeds the limit.

However, the insurance limit resets at each insured financial institution where you hold an account. That means you could be insured for more if you spread your CD ladder out across different insured banks or credit unions.

Cons

CD laddering isn’t for every investor. Here’s why.

It’s hands-on: Every time a CD matures, there’s a little work involved. Whether you cash out the CD or reinvest it, you’ll need to handle the details. This may not appeal to investors who want to “set it and forget it.”

You could miss out on rising rates: CDs come in varying lengths, from a few months to 10 or more years. So if some of the rungs on your CD ladder have longer terms, you may be locked out from your funds along with the chance to get a higher interest rate if rates happen to rise in the interim.

(On the flip side, creating a ladder with shorter terms can help avoid missing out on rising rates because you can reinvest the funds in another CD or investment should interest rates increase.)

Early-withdrawal penalties: Want to dig into your CD before the maturity date? If your CD comes with an early-withdrawal penalty, you’ll be eating away at earned interest when pulling your funds. CD laddering helps mitigate the need for early withdrawals, but it’s possible you’ll still decide to break a CD term.

Before building a CD Ladder?

Before creating your CD ladder strategy, do some prep work to make sure the investment fits your needs.

Check your emergency reserves

Make sure you have an emergency fund to cover any short-term problems you might run into. If all your savings is in your CDs, you’ll risk having to pay an early-withdrawal fee if an emergency comes up and you don’t have enough to cover it in your regular accounts.

Set your financial goals

Your financial targets might include goals like a vacation in the next year, a bigger emergency fund in two years or a down payment on a house in five years. Use your CDs strategically by lining up your CD ladder maturities to cash out when you plan to meet those goals.

Shop around for interest rates

There are plenty of banks and credit unions that offer CDs. Consider whether you value convenience, customer service, higher interest rates or some other factor. Maybe a nearby bank offers a high rate, or an online credit union has a minor penalty for early withdrawal.

How to Build a CD Ladder

There’s not one “right” CD ladder strategy. You can put your money in a mix of short- and long-term CDs that best suit your investment time frame and your need for income and liquidity. Here’s a simple example of how to create a CD ladder.

Step 1: Open the CDs

Let’s say you have $20,000 to invest. How do you want to split up the money? For this example, let’s say you decide to divide your money into four equal parts and open four CDs at once.

Stagger the maturity dates so they align with when you need the money. Mark your calendar so that you know when each matures.

• CD 1: $5,000 in a six-month CD
• CD 2: $5,000 in a 12-month CD
• CD 3: $5,000 in a three-year CD
• CD 4: $5,000 in a five-year CD

Step 2: Reinvest the money

Here’s the “hands-on” part we mentioned earlier. As your CDs mature, the bank may give you a grace period in which you can withdraw money, add money or change the term.

Instead of just letting your CD roll over, look around for a new CD with a better rate. Longer-term CDs, such as five years, often get higher returns.

If you open all your CDs in 2018, here’s what your maturity dates will look like and the types of terms you could roll into.

• CD 1: In 2019, roll the funds into a one-year CD
• CD 2: In 2019, roll the funds into a two-year CD
• CD 3: In 2021, roll the funds into a five-year CD
• CD 4: In 2023, roll the funds into another five-year CD

Step 3: Repeat or cash out

Every time a CD becomes due, ask yourself whether you need the money for one of your financial goals — or whether you can roll all (or part) of it into a longer-term CD at a higher interest rate.

Comparing CD Ladder to other Savings and Investing Options

Laddering CDs has its advantages, but you might be wondering how it measures up against other ways to save and invest.

A savings account or money market account, for example, could offer more convenient access to your savings. Federal law allows you to withdraw money from these accounts up to six times per month with no penalty.

The trade-off, however, is that you may not earn as high an interest rate on a savings or money market account as you could with a CD.

Whether to choose a savings account over a CD ladder could hinge on how much interest you’re hoping to earn and how often you’ll need to tap into your savings.

While CD ladders can generate solid interest earnings, the return potential isn’t the same as investing money in the market.

Investing in stocks and mutual funds, for example, could yield significantly higher returns when the market is doing well. That’s beneficial when inflation is rising, since interest rates on CDs may not always keep pace.

While it can help accelerate your efforts to build wealth over the long term, investing can be risky.

There are no guarantees that your investments will increase in value and you can lose money if the market becomes volatile. CDs can offer more security and peace of mind.

When deciding how to save, it’s helpful to consider the bigger picture and where CD ladders fit into it. Different financial goals may be served better by different financial products.

For instance, both a 401(k) and an individual retirement account can be useful when investing for retirement. A high-yield savings account could be a good choice for holding your emergency savings.

CD ladders can offer a middle ground when you’re saving for both the short and the long term. The more diversified you are with your saving and investing, the better.

What are CD Interest Rates?

All of the CD accounts below are insured by the FDIC at banks or the NCUA at credit unions. When selecting the best CD account for you, look for the highest yield while also considering introductory rates, minimum balances and accessibility.

The Federal Reserve and CD rates

The Federal Reserve’s interest rates decisions can impact the rates that banks offer on CDs. When the Fed raises or lowers the federal funds rate, banks typically respond by moving savings and money market account yields in the same direction. CDs tend to track Treasurys closely.

In 2019, a year when the Fed lowered rates three times, CDs generally decreased before or after a Fed rate cut.

Two emergency Fed rate cuts in March, and decreasing Treasurys, are reasons many high-yield CDs have decreased in 2020.

If you’re concerned about rates potentially decreasing or want to lock in a fixed yield, a CD may be right for you. Savings accounts and money market accounts generally have variable rates, meaning your yield can decrease.

Introductory rates on those accounts are an exception to this rule. Intro rates may give you a fixed rate during the introductory period, though there may be certain requirements to keep this rate.

National Average Interest Rates for CDs

Learning about the average interest rates is a great way to get an idea of the CD rate environment. But you should aim to get a CD with a yield much higher than the average. The top CD yields are typically available at online banks.

Here are the current average rates for the week of September 30, 2020, according to Bankrate’s weekly survey of institutions:

Best CD rates from top banks

Before applying for a certificate of deposit, be sure to read expert advice and tips below to ensure a financially safe decision. Here are our top picks for banks with the best CD rates:

1. Marcus by Goldman Sachs: 6 months – 6 years, 0.25% APY – 0.70% APY; $500 Minimum Deposit to Open

Marcus is the consumer banking arm of investment firm Goldman Sachs. It offers a range of savings products and personal loans. That includes a number of CD options and a high-yield savings account.

And like other online banks, its rates are highly competitive. Marcus often is found within the group of banks offering the highest CD rates across all terms.

In fact, Marcus guarantees that you’ll receive the highest rate it offers on a CD within 10 days of opening an account, as long as you deposit $500 during that time. So, if you purchase a CD and the bank’s rate goes up within 10 days after you purchase, you’ll receive the higher rate.

Perks: In addition to high yields, Marcus’ CDs offer a wide range of terms — from six months to six years — providing plenty of flexibility. And its 10-day guaranteed rate on CDs means you won’t miss out on a higher return.

On a high-yield CD, you can add to it during the first 30 days – even if you’ve reached the $500 minimum requirement.

Marcus by Goldman Sachs now has an app available on iOS and Google Play, where you can view your account balance.

What to watch for: Since it’s an online bank, Marcus doesn’t have any branches. Marcus also doesn’t offer a checking account. If you’re looking for a full-service bank, you may be better served elsewhere.

On its high-yield CDs, if you withdraw from a CD early, Marcus has a penalty of 90 days of simple interest on a CD that has a term less than 12 months, a penalty of 270 days of simple interest on a CD ranging from one year to five years and a penalty of 365 days of simple interest on a CD with a term longer than five years.

If you’re concerned about early withdrawal penalties, Marcus has a no-penalty CD. This CD has three terms to choose from: seven months, 11 months or 13 months.

You’re able to withdraw from a Marcus no-penalty CD beginning seven days after the day you fund the CD. But you can’t make a partial withdrawal.

Also, once the balance on your no-penalty CD hits the minimum balance requirement of $500, you can’t add to this CD.

2. Synchrony Bank: 3 months – 5 years, 0.25% APY – 0.90% APY; $2,000 Minimum Deposit to Open

Synchrony Bank, formerly known as GE Capital Retail Bank, offers a number of depository products for consumers, including CDs, money market accounts and savings accounts.

As an online bank, it has limited branches. It also doesn’t offer a checking account. But it does consistently offer some of the best rates available on CDs, with terms ranging from three months up to 60 months.

And Synchrony has a highly rated customer service department available by online chat or by phone seven days per week. Customers of Synchrony get access to loyalty perks, including complimentary identity theft resolution services and travel and leisure discounts.

“Diamond customers” get a dedicated customer service number, access to webinars, three free wire transfers per statement cycle and unlimited ATM reimbursements.

Perks: High rates are undeniably one of the biggest perks of CDs offered by Synchrony. But Synchrony also frequently offers CD specials that come with specialty terms. Those specials often come with high rates and provide an alternative to the typical CD terms. In addition, you won’t find a monthly service fee at Synchrony Bank.

What to watch for: Synchrony Bank isn’t a full-service bank. It doesn’t offer a checking account. That means you won’t have much liquidity. But sometimes that can be a good thing, if you’re looking to keep your hands off your cash while it grows.

Synchrony has early withdrawal penalties on its CDs. If you withdraw early from a CD with a term of 12 months or fewer, you’ll pay a penalty of 90 days of simple interest at the current rate.

If you made an early withdrawal on a CD with a term of more than a year but fewer than four years, you’d incur a penalty of 180 days of simple interest at the current rate. If you broke a Synchrony CD with a term of more than four years before it matured, you’d pay 365 days of simple interest at the current rate.

If you withdraw interest that’s been earned and credited during the CD’s current term, you won’t incur a penalty.

3. Barclays Bank: 3 month – 5 years, 0.10% APY – 0.40% APY; No Minimum Deposit to Open

Barclays is popular for its credit cards and personal loans, but it’s also a strong contender in the category of deposit accounts. In fact, the bank offers a full suite of products, including a slew of online CDs and an online savings account.

Its rates are competitive across the board. In the U.S., its banking operation is only online. That means Barclays can save on overhead costs and consistently pass that savings on to customers by offering some of the top available rates on CDs and savings accounts.

The bank’s CD terms range from three months to 60 months and require no minimum deposit, something that’s hard to find out of a high-yield CD.

Perks: Competitive interest rates and no minimum deposit requirement make CDs from Barclays hard to beat. You’ll also get the benefit of an online banking experience and no hidden monthly fees.

What to watch for: Barclays, like many other online-based banks, isn’t a full-service banking institution. It doesn’t have a checking account, ATM network, mobile app or branch locations.

If you’re comfortable banking online, and only want to use Barclays for its savings products, credit cards or personal loan features, it can be a good fit.

Otherwise, you might want to look elsewhere. And though Barclays CD rates are competitive, you may be able to lock in a higher rate from other online institutions.

At Barclays, there’s a penalty of 90 days of simple interest on the amount withdrawn early from a CD with a term of two years or fewer.

A Barclays CD that has a term longer than two years will have an early withdrawal penalty of 180 days of simple interest on the amount withdrawn before maturity. Barclays doesn’t offer a no-penalty CD.

4. Comenity Direct: 1 year – 5 years, 0.60% APY – 0.90% APY; $1,500 Minimum Deposit to Open

Comenity Bank is best known for its co-branded, private label and business credit card programs. Comenity Bank and Comenity Capital Bank partner with more than 160 retailers worldwide on those credit cards.

Comenity Direct was created in 2018. And in April 2019, Comenity Direct launched a High-Yield Savings Account and five CDs.

Perks: Comenity Direct has competitive yields on five terms of CDs, and its CDs are FDIC-insured and interest accrues and compounds on a daily basis. Comenity Direct made its April 2019 debut by offering top-tier yields on all of its CD selection.

What to watch for: Comenity Direct has an early withdrawal penalty on its CDs. The penalty on CDs from a year to three years is 180 days of simple interest and 365 days simple interest on terms four years and longer. Partial withdrawals of principal aren’t allowed.

5. Citizens Access: 1 year – 5 years, 0.60% APY – 0.75% APY; $5,000 Minimum Deposit to Open

Citizens Financial Group, which has roots dating back to 1828 via High Street Bank, launched Citizens Access – its direct bank – in July 2018. Citizens Access debuted among some of the highest-yielding accounts and is still near the top of the leaderboard.

Perks: Citizens Access takes pride in its fee-free approach. Its CDs also give you the option of having your interest credited toward your principal or you can transfer it to another account.

What to watch for: If you withdraw from your Citizens Access CD before it matures, a CD with a term of one year or shorter will be subject to a penalty of 90 days of interest on the CD balance.

A long-term CD at Citizens Access will receive a penalty of 180 days of interest on the CD balance if there is an early withdrawal.

6. American Express National Bank: 6 months – 5 years, 0.10% APY – 0.55% APY; $0 Minimum Deposit to Open

While American Express is perhaps most known for its credit cards, the company also provides savings accounts and CD options to consumers.

The FDIC-insured national bank offers attractive rates on all of its savings products. Its CD rates are often the top-paying in the country. As an extra bonus, it doesn’t have any fees or minimum balance requirements.

Perks: Extremely competitive interest rates, no minimum balance requirements, no fees and an easy application process make CDs from American Express hard to beat.

American Express also offers a wide range of terms to fit your needs, whether you’re looking for a short 6-month deposit account or a longer 60-month option.

What to watch for: Like some other similar banks in the space, American Express doesn’t have a checking account option or an ATM card. Checks need to be mailed in. And customer support is limited to the phone. If you’re looking for a full banking experience, you might be better served at another bank.

If you withdraw from an American Express CD that has a term of less than one year before it matures, you’ll incur a penalty of 90 days of interest on the amount withdrawn.

CDs with a term of a year but shorter than four years will incur a penalty of 270 days of interest on the amount withdrawn if the amount is taken out before that CD matures. A CD that’s at least 48 months long but shorter than 60 months will have a penalty of 365 days of interest on the amount withdrawn.

And a CD with a term of five years or longer will have a penalty of 540 days of interest applied if you withdraw your principal balance or if the account is closed before it’s set to mature.

7. Capital One: 6 months – 5 years, 0.20% APY – 0.60% APY; $0 Minimum Deposit to Open

Capital One is often associated with credit cards, but it also provides a range of depository and lending products to consumers through Capital One, an online banking subsidiary.

Capital One offers a wide range of CDs, a savings account, a savings IRA and a checking account. Yields from Capital One tend to be competitive. In fact, CD rates from the bank are consistently among the top nationally available options.

Along with stellar rates, Capital One’s banking products come with the security of being insured by the Federal Deposit Insurance Corp.

Perks: High yields and low fees make CDs from Capital One top contenders. And it offers a wide range of term options, from six months to 60 months.

But Capital One also provides quality banking tools for money management and excellent customer service. In fact, it has a number of Capital One Cafes spread throughout the country.

Read Also: Investing for Retirement: The Complete Guide

What to watch for: Capital One’s highest yields are the one-year CD and the 18-month CD. After these competitive APYs, the yields begin to drop off starting with the two-year CD. 

Capital One CDs with a term of a year or shorter have a penalty of three months’ worth of interest. Capital One CDs with terms longer than a year have a penalty of six months’ worth of interest

Conclusion

A CD ladder is best for investors who want to keep all or part of their cash in low-risk investments that have higher returns than your average savings or money market account.

If that sounds like you, then sort out your short-term financial timeline, shop around for the best CD rates and plan your CD ladder to coincide with your financial goals.