Brokered CD Ladders: What Are They And How To Build One

Larry, Managing Editor

brokered cd ladder

One of the most main restrictions of a CD, or Certificate of Deposit, is that you cannot touch your cash in this savings account for a certain amount of time. In return, you are paid a certain interest rate for a certain amount of time. But what if there was a way to take advantage of the higher interest rates that CDs offer while also being able to access your cash?

Creating a CD ladder requires splitting your investment, typically in equal fractions, across several Certificates of Deposit (CDs) that have varied term lengths and mature at different times. A typical CD ladder will consist of five “steps,” with each CD’s term extending one year longer than the previous one, up to a maximum of five years.

This means if you decide to hold all the CDs to maturity, after the first year, you have the opportunity to access your cash or to decide to reinvest in a new CD. 

A brokered CD ladder consists of building a CD ladder with brokered CDs instead of bank CDs. The benefits of a brokered CD ladder are enhanced liquidity without an early withdrawal penalty, higher returns and higher APYs (annual percentage yields), and investments that are FDIC-insured

Key Takeaways

  • Building a brokered CD ladder involves working with a brokerage firm to purchase CDs from multiple banks and credit unions
  • Brokered CDs may offer higher interest rates than traditional CDs and provide access to a wider range of terms
  • It’s important to research and compare brokered CD options and fees before investing
  • Building a brokered CD ladder is similar to building a traditional CD ladder but may require more careful management and monitoring.

How to Build a Brokered CD Ladder

To build a brokered CD ladder, divide your investment amount into equal fractions to invest in multiple CDs with different maturity dates. Ideally, work with a brokerage firm to access a wider range of CD options.

Brokered CDs are similar to traditional CDs. The main difference is that brokered CDs are CDs sold through brokerage firms instead of directly from a bank. Brokered CDs commonly pay higher CD rates than traditional CDs. The maturity dates for brokered CDs can range from 3 months to over 20 years. A brokered CD ladder offers the flexibility to buy multiple CDs to manage liquidity while earning rates from long-term CDs.

When building a brokered CD ladder, it’s important to consider the interest rate and maturity date of each CD. This will help you build a CD ladder that meets your financial needs and goals. Brokered CD ladders take advantage of higher interest rates and longer maturities due to increased variety in CD selection.

Here’s a simplified version of the steps you would take to create a CD ladder:

  1. Decide on an Amount and Length of Time: The first step is to decide how much money you want to invest and for how long. You’ll be dividing this total amount into smaller fractions, each of which will be put into a different CD. For example, if you have $5,000 and want to start a 5-year ladder, you might decide to open five $1,000 CDs. Ultimately, you should decide the best CD term for you (either longer or shorter!). 
  2. Open Several CDs with Different Terms: Using the example above, you’d buy a 1-year CD for $1,000 CD, buy a 2-year CD, buy a 3-year CD, all the way up to a 5-year CD.
  3. Wait for the First CD to Mature: Once you’ve opened your CDs, wait for the first CD to mature. In our example, you’d wait one year before your first $1,000 CD matures.
  4. Roll Over Maturing CDs into the Longest-Term CD: When the first CD matures, you take that money (plus the interest you’ve earned) and open a new five-year CD (since five years was the longest term in your original ladder).
  5. Repeat as Each CD Matures: After the second year, your original two-year CD will mature. You roll that into a new five-year CD as well, and so on.

In this way, after the first few years, you’ll have a five-year CD maturing every year, which you can then reinvest into another five-year CD. You’ll be getting the higher interest rate of the five-year CDs, but you’ll have the opportunity to access (or reinvest) a portion of your money every year.

An Example of a CD Ladder

Here is an example of a CD ladder:

Assume an investor has $10,000 to invest in CDs. The investor decides to divide the money into five CDs of equal amounts, each with different maturity dates. The CD ladder strategy would look like this:

  • $2,000 in a 1-year CD at 2.5%
  • $2,000 in a 2-year CD at 2.75%
  • $2,000 in a 3-year CD at 3%
  • $2,000 in a 4-year CD at 3.25%
  • $2,000 in a 5-year CD at 3.5%

In this example, the investor would have access to $2,000 each year when one of the CDs matures. The investor could choose to reinvest the money into another long-term CD or use the money for other purposes. This strategy allows the investor to take advantage of higher interest rates on longer-term CDs while still having access to some of their funds at regular intervals.

Managing Your Ladder

Once you’ve set up your CD ladder, it’s crucial to keep an eye on it to ensure it meets your financial goals. Here are some tips to help you manage your brokered CD ladder:

  1. Keep track of maturity dates: Make sure you know when each CD in your ladder is set to mature. This will help you plan for future investments and ensure you have access to your funds when you need them.
  2. Monitor interest rates: Keep an eye on the interest rates of your CDs. If you notice that rates are rising, you may want to consider reinvesting your funds in brokered CDs with a higher APY. Conversely, if rates are falling, you may want to consider investing in shorter-term CDs to take advantage of higher rates in the future.
  3. Rebalance your ladder: As your CDs mature, you’ll need to reinvest your funds in new CDs to maintain your ladder. This is a good time to evaluate your financial goals and adjust your ladder accordingly. For example, if you need access to your funds sooner than expected, you may want to invest in shorter-term CDs.

Managing a brokered CD ladder requires attention to detail and planning. By keeping track of maturity dates, monitoring interest rates, rebalancing your ladder, and consulting with a financial advisor, you can ensure that your CD ladder is working for you and helping you achieve your financial goals.

Summary of Building Brokered CD Ladders

In conclusion, building a CD ladder can be a smart financial move for those looking to grow their savings while maintaining access to cash. A brokered CD ladder can offer a wider range of options and greater flexibility, with higher yields.

With these factors in mind, you can build brokered CD ladders that meet your cash and investment needs and achieve your savings goals over time.