CD Ladder vs. Bond Ladder: Which Liquidity Strategy Offers Better Returns?

Locking in a competitive interest rate can be a smart way to grow your savings. But what if you could earn attractive returns without tying up all your money for years at a time? That’s where CD ladders and bond ladders come in.

Both strategies let you stagger investments across different maturity dates, so you can keep earning interest while maintaining regular access to your money. But which one offers the best returns: CD ladders or bond ladders? Here’s how these strategies compare and how to decide which is right for your financial goals.

What is a CD ladder?

A CD ladder is a strategy in which you spread your money across multiple CDs with staggered maturity dates. As each CD matures, you get access to a portion of your cash over time instead of waiting for a singular maturity date to access all of your funds at once. 

This strategy can help mitigate risk by giving you the recurring opportunity to either renew individual CDs or withdraw your cash. It also lets you take advantage of whichever CD term is offering the best interest rate.

CD ladder example

Imagine you have $40,000 you want to deposit into CDs. The bank’s 1-year CD rates are the highest, but you don’t want to lock up all your money for that long to get the best rate. So, you set up a CD ladder, putting $10,000 into four different accounts with terms ranging from three months to one year:

CD TERM	AMOUNT	APY	INTEREST EARNED
3 months	$10,000	3%	$74.17
6 months	$10,000	3.25%	$161.20
9 months	$10,000	3.5%	$261.37
12 months	$10,000	4%	$400.00

In this scenario, you have a $10,000 CD maturing every three months. And when each CD matures, you can decide whether to renew it, reinvest the money in a CD a different term and/or rate, or withdraw the cash and put it elsewhere.

Pros and cons of a CD ladder

Before setting up a CD ladder, consider these pros and cons:

Pros

• Regular access to cash: With CDs maturing at regular intervals, you have frequent opportunities to withdraw cash penalty-free, if needed.
• Regular renewal opportunities: When CDs in your ladder mature, you have the chance to renew them. If rates have gone up, you can lock in those higher earnings.
• Predictable returns: CDs offer fixed interest rates for the entire term, so you know precisely how much you’ll earn by the time each CD matures. 
• Deposit insurance: Most CD deposits are federally insured up to $250,000 per depositor, per institution, per ownership category. That means if the financial institution fails, you’ll get your money back. 

Cons

• Regular maintenance: A CD ladder isn’t a “set-it-and-forget-it” strategy. You’ll have multiple maturity dates to track, at which point you’ll have to decide whether you want to renew the CD, put the money into a different CD, or withdraw the cash. 
• Less liquidity: CD ladders give you scheduled access to cash, but you can’t withdraw the money whenever you want. If you make withdrawals before a CD matures, you have to pay an early withdrawal penalty. 
• Interest rate risk: Because CDs pay fixed interest rates, you lock in your rate until maturity. If interest rates rise after opening a CD, you’ll be stuck with the lower rate throughout the CD’s term (with the exception of bump-up CDs).
• Inflation risk: If inflation outpaces your CD’s interest rate, your money will lose buying power over time.

What is a bond ladder?

Bonds are low-risk investments that pay you a fixed rate of return. For this reason, the “laddering” approach common with CDs also works with bonds. A bond ladder is similar to a CD ladder: It’s a group of bonds with evenly staggered maturity dates. Splitting your cash between multiple bonds gives you regularly scheduled access to maturing bonds and can help you adapt to a changing financial climate. 

Bond ladders can include government bonds, municipal bonds, corporate bonds, and even bond ETFs. Compared to CDs, bonds often come with longer investment timelines — with terms up to 30 years.

Example of a bond ladder

Say you have $40,000 to invest in bonds. Instead of putting it all in bond that matures in four years, you spread it out over four different bonds with a range of interest rates and staggered maturities:

CD TERM	AMOUNT	APY	INTEREST EARNED
1 year	$10,000	3.8%	$380
2 years	$10,000	3.9%	$780
3 years	$10,000	4%	$1,200
4 years	$10,000	4.1%	$1,640

In this example, a bond will mature every year. At that point, you can reinvest the money by purchasing another bond or use the money elsewhere.

Note: Actual bond returns depend on the coupon rate, purchase price (premium or discount), reinvestment, and whether the bond is held to maturity. Some types of bonds, like savings bonds, require you to hold them for a minimum number of years before cashing in, otherwise you must forfeit a portion of the interest earned.

Pros and cons of a bond ladder

When building a bond ladder, keep these pros and cons in mind:

Pros

• Regular access to cash: Like a CD ladder, a bond ladder gives you regular, scheduled access to your cash. When bonds mature, you can choose whether or not to reinvest the cash.
• Diversification: A bond ladder lets you diversify in multiple ways. By building a ladder with varying interest rates, maturities, and bond types, you can potentially reduce default, tax, and inflation risk. 
• Regular payouts: Some bonds issue interset payouts at regular intervals throughout their terms, providing a predictable stream of income. 
• Potential tax advantages: U.S. Treasury bonds, bills, and notes are taxed at the federal level, but not the state or local level. Municipal bonds may be exempt from taxes, too.
• Potential inflation protection: Treasury Inflation-Protected Securities (TIPS) provide a hedge against inflation. The principal increases or decreases with inflation, and at maturity, you either receive the original principal or the inflation-adjusted principal — whichever is greater.

Cons

• Ongoing maintenance: Bond ladders, like CD ladders, require ongoing maintenance and decision-making every time a bond matures. Again, you’ll have to track individual bonds’ maturity dates.
• Interest rate risk: When interest rates rise, the price of existing bonds decreases. So if you need to sell a bond before maturity, you might not get what you paid for it.
• Inflation risk: Aside from inflation-protected bonds, bonds in your ladder may lose purchasing power if inflation outpaces interest rates.
• Potential default: While mody bonds are considered ultra-low-risk, there is a potential for default if the bond issuer fails to make required payments. 
• Lower returns compared to other investments: While bonds carry little risk, that also means they don’t offer the same growth potential as other securities, such as stocks and mutual funds.

CD ladder vs. bond ladder: Key differences

	CD LADDER	BOND LADDER
Product type	Deposit account	Security
Insurance	FDIC or NCUA insurance up to $250,000 per depositor, per institution, per ownership category	No insurance, but low risk
Potential penalties	Early withdrawal penalties	You can lose money selling bonds before maturity
Interest paid	At maturity or on a regular schedule	At regular intervals, when bond matures, or a combination of both
Taxes on interest	Generally taxed as ordinary income	Depends on bond type; may be exempt from some taxes

How interest rates affect each laddering strategy

With fixed-rate CDs, you earn predictable interest throughout your CD’s term. Here’s how rising or falling interest rates can affect your CD ladder strategy:

• CDs and rising interest rates: When rates rise over time, you’re able to reinvest CD earnings as they mature at regular intervals, taking advantage of the new, higher rates. However, some of your money will be locked into longer-term CDs with the older, lower rates.
• CDs and falling interest rates: CDs generally continue earning interest at whatever rate you locked in when the account was opened. So, when rates fall, long-term CDs are advantageous. When a CD matures, you can decide whether or not to deposit it in a CD, likely with a lower interest rate, or use the money elsewhere. 

When it comes to bond ladders, a similar principle applies. Regular maturities allow you to reinvest or not, depending on the current interest rate environment. However, because bonds can be bought and sold before maturity, there’s another layer to how interest rates affect bond ladder strategy.

• Bonds and rising interest rates: When interest rates rise, existing bond prices tend to fall. That can make it harder to sell bonds before maturity, and you may not get what you paid for them. However, when a bond matures, you can reinvest the money into a bond with a higher rate.
• Bonds and falling interest rates: When rates fall, your existing bonds become more valuable. But when they mature, you’ll likely need to invest them at lower rates.  

Tax considerations

Interest you earn from a CD is taxed as ordinary income, just like your salary or wages. You generally have to pay taxes on these earnings for the year you receive them (or are entitled to receive them), even if you deposit it right back into another CD. If a CD has a maturity longer than one year, you still have to report the portion of interest accrued that tax year as income.

On the other hand, bond ladder taxes are dependent on the type(s) of bonds they include:

• U.S. Treasury bills, bonds, and notes are taxed at the federal level but not at the state or local level.
• Municipal bonds are generally (but not always) exempt from federal taxes and may be exempt from state and local taxes.
• Corporate bonds are generally taxed as ordinary income.

In short, taxes on CD ladders are relatively straightforward, but taxes on bond ladders depend on the type of bonds that make up your portfolio.

Which should you choose: CD ladder or bond ladder?

Whether you choose a CD ladder or a bond ladder depends on your financial situation, risk tolerance, and goals. Your circumstances may be unique, but the following are some general rules to help you decide where to put your money.

CD ladders may be better for:

• Conservative savers
• Retirees prioritizing safety
• Emergency fund or short-term savings goals
• Investors uncomfortable with market fluctuations

Bond ladders may be better for:

• Income-focused investors
• Retirees seeking higher yields
• Investors with larger portfolios
• Those willing to accept some risk for potentially greater returns

Can you combine CD and bond ladders?

Yes, you can combine CD and bond ladders — there’s no rule against it. But ensure each strategy has a unique purpose in your portfolio. For instance, a CD ladder might make sense for growing a portion of your savings over the next several years. Meanwhile, a bond ladder might be a longer-term tool to mitigate risk in your investment portfolio.

Keep in mind, however, that both CD ladders and bond ladders offer modest growth. If you’re trying to save for retirement, you’ll likely need stocks or other growth-oriented assets in your portfolio to reach your financial goals.