Why Now Daily.

Published

I Bonds vs TIPS: Inflation Protection Explained

I Bonds are nonmarketable savings bonds with a composite rate and a one-year lock; TIPS are marketable 5-, 10- or 30-year securities whose principal adjusts with CPI-U and whose value can fluctuate before maturity. Liquidity, taxes, purchase limits and cash-flow needs drive the comparison.

Timeline

  1. Purchase: Buy electronic I Bonds in TreasuryDirect, or buy TIPS at auction or through a bank, broker or dealer.
  2. During ownership: I Bond rates reset for each six-month earning period; TIPS principal adjusts with CPI-U and pays interest every six months.
  3. Exit: Redeem an I Bond after the one-year lock subject to any penalty, or hold TIPS to maturity or sell at the market price.

Series I savings bonds and Treasury Inflation-Protected Securities both link returns to U.S. inflation, but their structures are different. An I Bond is a nonmarketable savings bond registered to an owner and held for as long as 30 years. TIPS are marketable Treasury securities issued in 5-, 10- and 30-year terms. They can trade before maturity, which creates price gains or losses even though both are obligations of the U.S. Treasury. [1][2][3]

An I Bond’s composite rate combines a fixed rate set when the bond is issued with an inflation rate that Treasury resets in May and November. Each bond receives a new composite rate every six months according to its issue-month schedule. Interest accrues and compounds semiannually rather than arriving as cash payments. The composite rate cannot fall below zero, so deflation does not reduce the bond’s redemption value. [3][4]

A TIPS coupon rate is fixed at auction, while its principal rises with inflation and falls with deflation using non-seasonally adjusted CPI-U. Treasury pays interest every six months on the adjusted principal, so the dollar payment changes. At maturity Treasury pays the greater of the inflation-adjusted principal or the original par amount. That floor does not protect an investor who bought above par from every loss, and selling early exposes the holder to market prices and real-yield changes. [1][2][5]

Liquidity differs sharply. I Bonds cannot normally be redeemed during the first 12 months. Redemption before five years forfeits the latest three months of interest; after five years there is no early-redemption penalty. TIPS can be sold before maturity, but the sale price may be below the purchase price and a TreasuryDirect-held security must first be transferred to a broker or bank for sale. Holding TIPS to maturity removes secondary-market sale timing but not the opportunity cost of changing rates. [1][3][6]

Purchase channels and limits also differ. New I Bonds are electronic through TreasuryDirect, start at $25, and are limited to $10,000 per Social Security number or eligible entity per calendar year; the paper tax-refund purchase option ended in 2025. TIPS start at $100 and can be bought at auction through TreasuryDirect or through a bank, broker or dealer, with much higher auction limits. Brokerage purchases can include commissions, spreads or custody details. [1][3][7]

Tax timing can alter the fit. I Bond interest is subject to federal income tax but exempt from state and local income tax, and federal reporting can generally be deferred until redemption, final maturity or another taxable disposition. TIPS interest and inflation increases to principal generally create current-year federal taxable income even though principal adjustments are not paid until maturity; both are exempt from state and local income taxes. Consult current IRS guidance for an individual situation. [1][2][8]

I Bonds may fit money that can tolerate the one-year lock and purchase cap while avoiding market-price swings. TIPS may fit larger amounts, scheduled semiannual income or a portfolio that needs a tradable security, but early sale value fluctuates and taxable-account cash flow can be awkward. Neither guarantees that a household’s personal costs will match CPI-U. Compare real yield, horizon, tax account, liquidity and current Treasury rules rather than choosing from the headline inflation rate alone. [1][2][3]

Sources

  1. TreasuryDirect — Comparing TIPS and Series I Savings Bonds
  2. TreasuryDirect — TIPS
  3. TreasuryDirect — I Bonds
  4. TreasuryDirect — I Bond Interest Rates
  5. TreasuryDirect — Understanding Pricing and Interest Rates
  6. TreasuryDirect — Frequently Asked Questions
  7. TreasuryDirect — Paper I Bond Tax-Refund Program Ended
  8. TreasuryDirect — Tax Information for EE and I Bonds

Related stories