The CD Ladder

A CD, or Certificate of Deposit, is a type of savings account that offers a fixed interest rate for a specific time period. The individual putting money into a CD will usually face some type of fee or penalty if pulling money out before the agreed upon maturity date. Generally, CDs are offered in 3-month, 6-month, 1-year, all the way up to 5-year installments. Usually, the longer installment you choose, the better the interest rate.

Traditionally speaking, this interest rate offered would be at a better rate than the average savings account. Also, much like savings accounts, CDs (at least, the only one’s worth considering) are FDIC insured up to $250k per account. Unlike high yield savings accounts, the interest rate being offered will last for the life of the CD. The interest rates on high yield savings accounts are subject to change at any given time. CDs are an attractive option for those looking for a safe guaranteed return.

A CD Ladder is a tactic people use to get the highest return rate on CDs as possible, while still having access to their money once a year. This strat used to be more popular than it is today, but it still may be a solid option for certain solos out there, so it’s worth understanding.

Let’s say you have $10k sitting in the bank right now that you aren’t sure what to do with. If you decide to work the CD Ladder, you will split this amount up and put into multiple CDs of different maturity lengths (usually all one year apart from another). So, it might look like this:

• $2k in a 1-year CD (3%)
• $2k in a 2-year CD (3.5%)
• $2k in a 3-year CD (4%)
• $2k in a 4-year CD (4.5%)
• $2k in a 5-year CD (5%)

The return % I have shown above are all completely made up; but generally speaking, the longer it takes the CD to reach maturity, the better return % you can expect. Once the 1-year CD has reached maturity, you have the option to pull that money out or invest it back into a CD. Since the original 2-year CD is only a year away, the smart move (if putting back into a CD) would be to put it directly into a 5-year CD.

If you do this each year for 5 years, you’ll have each “rung” of the CD Ladder available to you once a year at the best interest rate CDs have to offer. So, after 5 years, the above example would look like this:

• $2,060 in a 5-year CD (5%) (Maturing in one year)
• $2,142.45 in a 5-year CD (5%) (Maturing in two year)
• $2,249.73 in a 5-year CD (5%) (Maturing in three years)
• $2,385.03 in a 5-year CD (5%) (Maturing in four years)
• $2,552.56 (Original 5-year CD now mature! Ready to put into another 5-year CD?)

It’s worth noting that while CD rates don’t change once in place, CD rate offerings change constantly. It’s possible that in year 3 we hit a low-interest rate environment, and 5-year CDs are simply not worth the investment at that time. The basic idea here is that you’ll have access to a portion of your original $10k once a year in case you need it, or if you decide that there are better investment opportunities for it.

Fixed Returns: The interest rate % you receive from the CD is guaranteed to not go lower than agreed upon for the life of the CD. The interest rate on high yield savings accounts can generally change at any time. With a CD, you’ll know exactly how much money to expect at the date of maturity.

Higher Interest Rates: Usually, CDs offer a higher rate of return than the standard high yield savings account. Rates of CDs will change according to the climate of the market you are currently in, be sure to check rates of several HYSAs before locking money into the CD of your choice.

FDIC or NCUA Insured: You’ll want to make sure the CD you are considering is insured (most of them are). This will protect your investment up to $250k per account, making it equally as safe as a savings account with a better return to boot!

Access To Funds Every Year: Each year, once a “rung” in the CD Ladder matures, you’ll be able to choose if you want to put it into another 5-year CD or use that money for other purposes. Putting the full investment into a 5-year CD would get you the better overall rate but lock up that money for a long period.

Discourages Impulse Spending: With your money locked up in CDs, you’ll be forced to decide if taking the penalty is worth that thing you are looking to purchase. It might behoove you to put that decision on hold for a few months till that next CD matures. A few months later, money in hand, you might decide you never needed a new motorcycle to begin with. 🤪

Fixed Returns: Just like above, the interest rate will not change for the life of the CD. You might be 2 years into a 5-year CD when interest rates suddenly shoot up. Unfortunately, you’ll be locked into the lower interest rate on this rung of the ladder for the next 3 years.

Returns Aren’t Great: Yes, the good CDs will beat the average HYSA but come nowhere near the standard returns of the stock market. Today, in 2025, CD rates hover around the 4% mark while we know the average 10-year return of the S&P 500 is north of 10%.

Taxes: Unfortunately, interest gained from CDs (even the longer ones) will usually get taxed as income, instead of the more favorable capital gains rate. The provider of the CD (bank or credit union) will issue the owner of the account 1099-INT statement each year, and any interest earned will be added to your overall income that year when filing taxes. This is no different than a HYSA, but stock market investment gains (if held for more than one year) will only be subject to capital gains tax.

Liquidity: While having access to the money once a year is good, having access to it at all times would be better. Depending on the rate of the CD vs HYSA at the time, it may not be worth locking up your investment like this.

Penalties: If something comes up and you need to withdraw funds prior to the maturity date of the CD, you will be subject to early withdrawal penalties. Typically, this will amount to a few months of interest earnings. Depending on the state of your cash holdings, it might be better to keep this money in a HYSA.

Inflation Risk: In 2022, America saw inflation rates getting north of 8%. No CD, even the ones being offered at the time, was able to keep up. If you are currently in a CD that offers a 4% return which matures in 2028, and suddenly 2026 sees inflation shoot up to 8% again, you are actively losing money due to the rise in cost of living.

Automatically Reinvested: The CD Ladder strat is going to require that you keep track of each maturity date on each “rung” of the CD Ladder. You’ll have a certain amount of time at the date of maturity, usually 7-10 days, to withdraw funds penalty free. If you happen to forget, the funds will be automatically reinvested into another CD for the same or similar term that was originally chosen. The kicker here is that the rate of the new CD will not be the same you originally chose, and you’ll face penalty for early withdrawal on the new CD if you don’t like the rate. Many banks will play games with this and lock you into a rate less than 1%. 😬

The true benefit to the CD today is that you’ll get a guaranteed return with a slightly better rate than the state of current HYSAs. That said, the lack of liquidity for a slightly better rate just doesn’t seem worth it to me. I’ve heard of people utilizing this method for their emergency savings account. 😬 If your AC goes out, are you going to sweat it out for 3 months till that next rung of the ladder matures? If you get a mechanical issue in your car, are you actually going to start walking to work for that time? Your emergency savings needs to be liquid; disaster isn’t going to strike when you want it to.

Let’s say you are comfortable with where your emergency savings is, are on track with the bucket fund, and come into a windfall of $10K from an unexpected bonus. You could utilize the CD Ladder strategy shown above, since you’ll get better returns than a HYSA. Personally, instead of going this route, I would put it in a taxable brokerage account and invest it. You’ll get better overall returns in the long run, and the money remains liquid the whole time. Not to mention you’ll most likely get better tax rates when withdrawing, as long as you keep it invested for over a year. Keep in mind, I am not a tax or finance professional, this is just the option I would go with.

However, there is a strat called the “Bullet CD Ladder Strategy” that might be applicable to some. Essentially, it’s like the CD Ladder but in reverse. Let’s say you want to save up $30k to have a downpayment to purchase a house in 4 years (2029). It wouldn’t be wise to stick savings for this in the volatile stock market, since it could be down at the time you need the money (the over/under here is generally 7-10 years). What you could do is put in the $10k you have now into a 4-year CD, set to mature in 2029. Then next year put another $10k into a 3-year CD and do it again the next year. In 2029 you’ll have the original $30k guaranteed, plus the interest made during that timeframe.

This strat is only best for large savings goals that have a specified date and is within the next 3-6 years. Most big savings goals that can be pushed out to 7-10 years would probably do better in the market, and most smaller ones would be better suited with the bucket savings strat in a HYSA for flexibility purposes.

Overall, I’m not a huge fan of the CD Ladder because of lower returns, lack of liquidity, and higher tax rates. Not to mention the tricks some of the big banks play when it comes to automatic reinvestments. I’m always a fan of keeping things simple, so introducing complexity must result in returns equal to (if not greater) than the hassle. In this case, I just don’t see it.

So why did I write a whole blog post about something I’m not going to do? Welp, you never know what the future holds. We might hit an era in the future where CD rates are greatly higher than HYSAs, and the CD Ladder makes sense to initiate. It never hurts to have this bit of knowledge in your back pocket, am I right? 🤪

The low-risk aspect of this approach leads to less returns over the long run. Most savings goals for the near future would be better utilized in a HYSA, and any savings goals 7-10 years in the future would offer better returns if invested in the market. As the great NFL Coach Bruce Arians once said, “No risk it, no biscuit!” 😂 At the same time, I’d rather see the Savvy Solo utilize this method than most of the annuities I’ve seen being offered today. 😬 The topic of annuities will be for another day, for now know that the number of people who should be using those are extremely few and far between.

Stay classy Solos! ✌️