How to Build a CD Ladder (With Real Numbers)

Nobody knows where deposit rates will be in three years. A ladder is the standard way of not having to guess. You buy several CDs on the same day with different end dates, and from then on the calendar makes the reinvestment decisions for you.

What a $25,000 ladder looks like

Split the money into five $5,000 pieces and open a one-year, two-year, three-year, four-year and five-year CD at the same time. Twelve months later the first one matures and you replace it with a fresh five-year CD. Repeat that each year. After four years every rung you hold is a five-year CD, yet one still comes due every twelve months.

Put example rates on it: 4.30% on the one-year and 4.05% on the five-year. The five-year rung compounds to roughly $6,098, so $1,098 of interest on $5,000. The one-year rung earns $215 and then goes back to work at whatever the new five-year rate happens to be. That is the trade the ladder makes for you. Most of the money sits at the long rate, but you never have to break a CD to reach some of it.

Keep the rungs equal

When five-year rates look generous, the temptation is to load up on the long end. That holds fine until month fourteen, when the boiler dies. Equal rungs keep the structure predictable, which is the entire point. If you want more liquidity, hold it outside the ladder in a savings account.

Running the numbers in the CD calculator

The calculator wants four things: the deposit, the APY, the term, and the compounding frequency. Run it once per rung and add the results. Deposit and term you already know. The APY is on the bank's rate sheet, usually printed beside the minimum opening balance. Compounding frequency lives in the account disclosure and is normally daily or monthly.

Enter the APY, not the nominal rate, and never both. APY already includes compounding, so a 4.00% rate compounded daily shows up as an APY near 4.08%. Typing 4.08% into a field that compounds it again inflates your answer. If that difference is fuzzy, our compound interest calculator guide sorts it out.

Ladder against a single CD

Run the whole $25,000 as one five-year CD, then run the five rungs separately and total them. At 4.05% the single CD grows to $30,488, so $5,488 of interest with every dollar locked for the full term. The ladder cannot be scored the same way, because four of its five rungs mature early and get reinvested at rates nobody knows yet. That is the honest comparison: one certain number against a range. The ladder pulls ahead when rates rise, since a fifth of the balance reprices every year, and it pulls ahead again in any year you need the cash.

Three things that quietly cost you money

Auto-renewal is the big one. Most CDs roll into a new term of the same length if you say nothing, often at a worse rate, and the grace period to opt out can be as short as seven days. Put every maturity date in your calendar the day you open the accounts.

Early withdrawal penalties are second. A common penalty on a five-year CD is six months of interest. On $10,000 at 4.00% that is about $200, and some banks will take it out of principal if the CD has not earned that much yet.

Tax is third. In the US, CD interest is taxed as ordinary income in the year it is credited, even when the CD has not matured and you have not touched a dollar of it. The bank sends a 1099-INT either way. If you are still deciding where the money should sit, our comparison of high-yield savings, CDs and money market accounts covers how each one behaves when rates move.

Common questions

How much money do I need to start a CD ladder? Five times the bank's minimum. A $500 minimum makes a $2,500 ladder workable. Small ladders are fine, since the structure matters more than the size and the interest scales in a straight line anyway.

Does a ladder still make sense if rates are falling? Yes, and arguably that is when it helps most. Locking four fifths of the money into longer terms ahead of a drop is exactly what you want. The cost is that each maturing rung reinvests lower, which is the price of not having guessed.

Should the rungs be one to five years? Match the ladder to when you might need the money. Saving for a house purchase two years out, use three, six, nine and twelve month rungs instead. The mechanics are identical, just compressed.