{"id":17484,"date":"2024-11-25T10:43:35","date_gmt":"2024-11-25T18:43:35","guid":{"rendered":"https:\/\/www.wealthfront.com/blog\/?p=17484"},"modified":"2024-11-25T10:52:18","modified_gmt":"2024-11-25T18:52:18","slug":"cd-vs-bond-ladder","status":"publish","type":"post","link":"https:\/\/www.wealthfront.com/blog\/cd-vs-bond-ladder\/","title":{"rendered":"Wealthfront\u2019s Automated Bond Ladder vs. a Certificate of Deposit (CD)"},"content":{"rendered":"\n

When the Federal Reserve cut the federal funds rate<\/a> in September 2024, the cut kicked off what many investors believe will be a period of falling interest rates. At a high level, this means borrowing costs (like the rate you pay on credit card debt or a mortgage) are likely to fall, but the interest you earn in a savings account will probably decrease over time, too. Understandably, you might be wondering if there\u2019s anything you can do to keep earning a higher rate on your savings.<\/p>\n\n\n\n

Certificates of deposit, or CDs, are one popular way to try to earn more interest than you otherwise might in a savings account. A CD is a savings certificate with a fixed maturity date and a specified, fixed interest rate that is typically higher than what you\u2019ll get from a savings account. CDs are generally issued by commercial banks and FDIC insured up to $250,000. Because the interest rate on CDs is fixed at purchase, they can be attractive when interest rates are expected to fall because it\u2019s possible to \u201clock in\u201d the rate when you buy the CD and keep earning that rate until maturity, even if interest rates fall further during that time. But CDs aren\u2019t the only option.<\/p>\n\n\n\n

Wealthfront doesn\u2019t offer a CD, but we do offer an Automated Bond Ladder\u2014a product with many of the same benefits as CDs and a few key advantages. Our Automated Bond Ladder<\/a> is a portfolio of US Treasuries with staggered maturities (commonly called a \u201cbond ladder<\/a>\u201d), making it a low risk investment option designed to provide a steady yield with no state income taxes. It is also SIPC protected up to $500,000. Like a CD, it allows you to \u201clock in\u201d an interest rate for your cash, which can be beneficial if you expect interest rates to fall.\u00a0<\/p>\n\n\n\n

In this post, we\u2019ll explain why if you\u2019re interested in a CD, you might actually prefer an Automated Bond Ladder.\u00a0<\/p>\n\n\n\n

Liquidity and penalties<\/h2>\n\n\n\n

Liquidity matters: Money you\u2019ve saved for your goals isn\u2019t so helpful if you can\u2019t access it when you need it without paying a penalty. And in many cases, an Automated Bond Ladder will offer more liquidity than a CD.\u00a0<\/p>\n\n\n\n

The process of getting started with a CD and an Automated Bond Ladder is similar in that, in each case, you\u2019ll have to decide how long you\u2019ll want to leave your money invested. When you open a CD, you\u2019ll choose what\u2019s known as the \u201cmaturity\u201d or \u201cterm length.\u201d This could be several months up to several years, and it\u2019s the period of time you\u2019re generally expected to leave the funds deposited within the CD. Similarly, when you open an Automated Bond Ladder, you\u2019ll pick your maximum maturity, which can be anything from three months to six years. Choosing a greater maximum maturity means you effectively \u201clock in\u201d your yield for longer (which can be good if you expect interest rates to decrease).<\/p>\n\n\n\n

But what if you pick a term length or maximum maturity that is too long, and you actually need your money sooner? This is where one of the key differences between CDs and an Automated Bond Ladder comes in. Many CDs will charge a penalty if you withdraw your funds before maturity (often 3-12 months\u2019 worth of interest<\/a>), which can eat into your total interest earned and even your principal in some cases. Wealthfront\u2019s Automated Bond Ladder, on the other hand, charges no penalties even if you sell before the Treasuries in your ladder mature. It\u2019s worth noting that you\u2019ll take on a small amount of risk to your principal if you withdraw from your Automated Bond Ladder before maturity, but you could also come out ahead\u2014it all depends on whether bond prices have gone up or down since you bought yours.<\/p>\n\n\n\n

After-tax returns<\/h2>\n\n\n\n

When you\u2019re comparing CDs and an Automated Bond Ladder, it\u2019s important to understand the differences in how their interest is taxed. Depending on your situation, these differences can be significant.\u00a0<\/p>\n\n\n\n

The interest you earn from a CD is taxed as ordinary income at both the state and federal levels, much like the salary you earn at your job and the interest from a high-yield savings account or Wealthfront Cash Account<\/a>. Automated Bond Ladders, however, are made up of US Treasuries\u2014bonds whose interest is exempt from state taxes.<\/p>\n\n\n\n

This means that even if interest rates for CDs and an Automated Bond Ladder are fairly similar, you are likely to come out ahead with an Automated Bond Ladder because you can keep more of any potential earnings, assuming you live in a state with income tax. The higher your state taxes, the more advantageous these tax benefits are likely to be for you personally. Wealthfront built a calculator<\/a> to help you understand how much you personally could benefit from these tax benefits.<\/p>\n\n\n\n

Callability<\/h2>\n\n\n\n

Finally, to understand the differences between a CD and an Automated Bond Ladder, it\u2019s important to know about callability.\u00a0<\/p>\n\n\n\n

Picture this: You\u2019ve deposited money you don\u2019t expect to need for five years into a five-year CD. Interest rates have declined, so you\u2019re feeling pretty good about the rate you locked in. Or at least you thought you locked it in\u2026 until your bank contacts you to say they\u2019re calling your CD, and you won\u2019t be earning that interest rate for five years after all.<\/p>\n\n\n\n

Some CDs are callable, meaning the bank that issued them can essentially back out early. If you were counting on earning that CD\u2019s yield for a set period of time, this can be a pretty frustrating experience. Wealthfront\u2019s Automated Bond Ladder, on the other hand, is made up with US Treasuries which are not<\/em> callable. So with an Automated Bond Ladder, you don\u2019t have to worry about this particular possibility.\u00a0<\/p>\n\n\n\n

Key takeaways<\/h2>\n\n\n\n

Both CDs and an Automated Bond Ladder can be attractive to investors looking to earn more on their excess cash. But the Automated Bond Ladder has a few key advantages over CDs:<\/p>\n\n\n\n

    \n
  • Wealthfront\u2019s Automated Bond Ladder does not charge early withdrawal penalties, unlike some CDs\u00a0<\/li>\n\n\n\n
  • Interest earned from an Automated Bond Ladder is exempt from state taxes, unlike interest from CDs<\/li>\n\n\n\n
  • The US Treasuries that make up an Automated Bond Ladder are not callable, whereas some CDs are callable<\/li>\n<\/ul>\n\n\n\n

    We hope this helps!\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"

    When the Federal Reserve cut the federal funds rate in September 2024, the cut kicked off what many investors believe will be a period of falling interest rates. At a high level, this means borrowing costs (like the rate you pay on credit card debt or a mortgage) are likely to fall, but the interest […]<\/p>\n","protected":false},"author":10000,"featured_media":15519,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[1282],"tags":[],"coauthors":[1270],"class_list":["post-17484","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing"],"acf":[],"yoast_head":"\nDoes Wealthfront Offer a CD (Certificate of Deposit)?<\/title>\n<meta name=\"description\" content=\"Wealthfront offers an alternative to CDs, an Automated Bond Ladder, with many similarities and some advantages.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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