CD Laddering

Understanding the mediums for risk-less investments, means understanding the various products banking institutions sell. A bank is a business just like the local coffee shop, electronics store, university, or hospital. Banks offer checking and savings accounts, money market deposit accounts, certificate of deposits (CD) and many other products.

The practice of CD laddering maximizes the use of the varying interest rates and maximizes liquidity. This practice is implemented by putting a like dollar amount into a series of CDs each maturing in intermediate intervals, i.e. a 6-, 12- and 18- month or a 1-, 2- and 3-year. Once this initial CD has matured, that may be reinvested in the greatest length term of the investment chain. If the chain follows a 6 month pattern, once the initial 6-month CD matures, that would be reinvested in an 18-month CD, similar with a 1-year chain – reinvested in a 3- or 5-year CD.

This plan does have one pitfall for those who go on auto-pilot. After a CD matures you have between 10 and 14 days to determine what you would like to do. You effectively have 3 choices.

1) Withdrawal of your money

2) Reinvest your money in the same product

3) Reinvest your money in another product

Most CDs will have an automatic reinvestment clause. By deciding to ladder, you must chose option 3 for the initial lifespan of the ladder. Say you decide to have a 3-year, yearly ladder. Once the 1-year matures, you must reinvest this money in a new 3-year. The same must be done for the 2-year. However, once you reach the maturity of the 3-year, you may opt to simply reinvest in the same product. As this is done usually automatically, all you must be aware of are tax implications (yes - you will receive a 1099 INT for interest accrued in the calendar year) and maturity date.

Today's Highest Online CD Rates

Bank	Product Term	Interest Rate (APY)
Northern Bank Direct	1-Year	5.60% APY with $500 minimum
Finworth, a division of InsBank	1-Year	5.38% APY with $50,000 minimum
TotalDirect, a division of City National Bank of Florida	1-Year	5.35% APY with $25,000 minimum
Dollar Savings Direct, a division of Emigrant Bank	3-Year	5.00% APY with $1,000 minimum
First Internet Bank of Indiana	3-Year	4.66% APY with $1,000 minimum
IncredibleBank	3-Year	4.58% APY with $1,000 minimum
First Internet Bank of Indiana	5-Year	4.55% APY with $1,000 minimum
BMO Alto, a division of Bank of Montreal Harris	5-Year	4.50% APY with no minimum
Department of Commerce	5-Year	4.34% APY with $500 minimum

Bank

Product Term

Interest Rate (APY)

Northern Bank Direct

1-Year

5.60% APY with $500 minimum

Finworth, a division of InsBank

1-Year

5.38% APY with $50,000 minimum

TotalDirect, a division of City National Bank of Florida

1-Year

5.35% APY with $25,000 minimum