I Bonds vs TIPS: How Two Inflation-Protected Treasuries Differ
I bonds and TIPS both protect savings from inflation, but I bonds add an inflation rate on top of a fixed rate, while TIPS adjust the principal itself with CPI-U and pay a fixed coupon on that adjusted principal.
That single mechanical split drives everything else. An I bond grows in value and never falls. A TIPS balance moves up and down with the index, and the cash payment moves with it.
The practical differences are limits, access, and taxes. You can buy only $10,000 of electronic I bonds per Social Security Number per calendar year. TIPS have no equivalent calendar-year cap, but selling one is slower than most savers expect.
Taxes are the part most people miss. TIPS principal increases are taxed in the year they happen, even though no cash reaches you. I bond federal tax can wait until you cash the bond.
Series I Bonds vs TIPS: Side-by-Side
| Series I Bonds | TIPS | |
|---|---|---|
| How inflation protection works | Inflation rate is added to a fixed rate; value accrues inside the bond | CPI-U adjusts the principal; fixed coupon is paid on the adjusted principal |
| Deflation floor | Composite rate stops at 0%; the bond never loses value | Principal can fall during the term; maturity pays at least the original principal (par), not your purchase price |
| Purchase limit | $10,000 electronic per SSN per calendar year | No calendar-year cap; $10 million noncompetitive limit per auction |
| Liquidity and secondary market | No secondary market; redeem through Treasury only | Tradable, but only through a bank, broker, or dealer; price moves with real yields |
| Federal tax timing | Deferred until you cash the bond or it stops earning | Owed every year, including on principal increases |
| Where to buy | TreasuryDirect | TreasuryDirect auctions, or the secondary market through a broker |
| Terms available | Earns interest for up to 30 years | 5, 10, or 30 years |
| Minimum hold | 12 months; lose 3 months of interest if cashed before 5 years | No Treasury holding requirement, but a TreasuryDirect purchase is locked 45 days before transfer or sale |
Which should you choose?
Choose I bonds for money you want protected, simple, and taxed later. The zero floor and the deferred federal tax make them easy to hold in a taxable account once the 12-month lock passes.
Choose TIPS for the two things I bonds cannot do: protect more than $10,000 in a single year, and give you a fixed maturity date you can match to a known future expense.
Do not choose TIPS for fast access. You cannot sell one inside TreasuryDirect, and a TreasuryDirect purchase must sit 45 days before you can even transfer it out. Neither security is a substitute for cash.
Hold TIPS inside an IRA or 401(k) whenever you can. The yearly tax on principal increases arrives with no cash attached, and a tax-advantaged account removes that problem entirely.
A common order for savers who want both: fill the $10,000 I bond limit first each year, then use TIPS inside a retirement account for anything above it.
How I bonds fight inflation
An I bond earns a composite rate built from two parts: a fixed rate and a semiannual inflation rate. The fixed rate stays with the bond for its whole life. The inflation rate resets every six months.
Treasury announces new rates on May 1 and November 1. For I bonds issued between May 1, 2026 and October 31, 2026, the composite rate is 4.26%. That comes from a 0.90% fixed rate and a 1.67% semiannual inflation rate. Rates announced in other windows differ, so always check the issue date a rate belongs to.
Your own bond does not switch rates on those calendar dates. It switches every six months from its issue month. A bond bought in January changes rates on July 1 and January 1.
Interest is added to the bond rather than paid out. It compounds twice a year, and the bond keeps earning for up to 30 years. The compound interest calculator shows how that kind of accrual builds over time.
How TIPS fight inflation
TIPS work on the principal instead of the rate. Treasury adjusts your principal using the Consumer Price Index, so the balance moves up with inflation and down with deflation.
The coupon rate itself is fixed and set at auction. Because Treasury pays that fixed rate on the adjusted principal, the dollar amount of each payment changes. Interest arrives every six months as real cash in your account.
TIPS come in 5-year, 10-year, and 30-year terms. The minimum purchase is $100, in $100 increments. Treasury issues and reopens the various maturities several times a year, so auctions are frequent.
That is the core mechanical point in tips vs i bonds. One security moves the balance and pays you cash. The other moves the rate and stores the growth inside the bond.
The deflation floor: what it protects and what it does not
An I bond cannot lose value. If the inflation component turns negative enough to drag the composite rate below zero, Treasury stops the rate at zero instead. The bond simply stops growing for that period.
TIPS behave differently during the term. Falling prices reduce your adjusted principal, and your interest payments shrink along with it. Sell at that point and you take the loss.
Maturity is where the TIPS protection kicks in. If the adjusted principal has fallen to or below the original amount, Treasury pays the original amount. That floor is set at par, the face amount of the security.
Read the floor carefully, because it protects par and not your purchase price. Buy a seasoned TIPS on the secondary market and you pay par times the accrued index ratio, which can sit well above par. If the index falls back before maturity, Treasury still pays only par, and the premium you paid becomes a real loss. The floor protects the original principal, not the buyer's cost.
So both securities have a floor, but the floors sit in different places. The I bond floor applies every single day. The TIPS floor applies only at maturity, and only up to par.
The tax trap: paying now for money you have not received
TIPS create taxable income before they create cash. The IRS treats each year's increase in inflation-adjusted principal as original issue discount. You report it as ordinary income in the year it accrues, and Treasury does not hand you that money until maturity or sale.
Here is the shape of it. Say you hold $50,000 of TIPS and inflation runs 3% for the year. Your principal rises by roughly $1,500. You owe federal tax on that $1,500 now, plus tax on the coupon, even though only the coupon reached your bank account. In a high-inflation year, the paper income can easily exceed the cash income.
That mismatch is why TIPS usually belong in an IRA or 401(k). Inside a tax-advantaged account, the yearly accrual creates no current tax bill and the problem disappears. In a taxable account, you may have to sell something else just to pay the tax on income you never touched.
I bonds avoid the issue by default. You can defer federal tax until you cash the bond or it stops earning interest, or you can elect to report the interest every year. Most holders defer, which is one reason I bonds sit comfortably in a taxable account.
Both are exempt from state and local income tax, which matters most in high-tax states. That exemption raises the effective yield against a fully taxable bank product. The high-yield savings calculator helps you compare a taxable cash yield against these on equal terms.
Limits, access, and the real cost of getting out
The purchase limit is the hard constraint on I bonds. You can buy $10,000 in electronic I bonds per Social Security Number per calendar year through TreasuryDirect. There is no secondary market, so Treasury is your only exit.
You also cannot touch the money for 12 months. Cash the bond before five years and you give up the last three months of interest. That penalty is modest, but the 12-month lock is absolute.
TIPS have no comparable calendar-year cap. A single noncompetitive bid at auction can run up to $10 million, which is why TIPS carry the larger balances.
Getting out of a TIPS is slower than most savers expect. You cannot sell one from inside TreasuryDirect at all. To sell a Treasury marketable security, you must work through a bank, broker, or dealer, which means moving the security into the commercial book-entry system first. A broker may charge for that transfer.
There is also a waiting period. A marketable security bought in TreasuryDirect must be held 45 days before you can transfer or sell it. So buying TIPS at a Treasury auction means a 45-day lockup, not same-day access. Buying through a broker from the start skips the transfer step, and the best brokers for Treasury bonds roundup covers where to do that.
Once a TIPS sits at a broker, price risk takes over. TIPS trade on real yields, so a rise in real rates pushes the market price down. Selling early can hand you a loss even in a period when inflation ran high.
If you want the savings-bond comparison instead, see I bonds vs EE bonds. For how any of this fits beside stocks, see stocks vs bonds.
Where each one fits next to plain cash
Neither security replaces a savings account for true emergency money. An I bond locks your cash for a full year. A TIPS can be sold, but only through a broker, and the price you get depends on the market that day.
A workable order is simple. Keep three to six months of expenses in a liquid account first. Then move surplus savings into inflation protection. Cash accounts reprice instantly, which is exactly what you want for money you may need next week. Our best high-yield savings accounts roundup lists current options.
If you are still choosing among cash products, HYSA vs CD and CD vs money market cover that step. Come back to I bonds and TIPS once the short-term buffer is funded.
You can model the growth side of any of these with the tools on the investing calculators hub.
Frequently asked questions
Which is better, I bonds vs TIPS?
Neither wins outright, and the choice turns on limits and taxes. I bonds fit up to $10,000 per person per year in a taxable account, because federal tax is deferred and the value never falls. TIPS fit larger amounts, fixed maturity dates, and accounts where you can shelter the yearly tax on principal increases.
Can TIPS lose money?
Yes, if you sell before maturity. TIPS prices move with real yields, so rising real rates lower the price. Deflation can also cut your adjusted principal during the term. Holding to maturity guarantees the original principal, or par, but not the price you paid if you bought above par.
Can I sell TIPS whenever I want?
Not directly, and not right away if you bought at auction. You cannot sell a TIPS from inside TreasuryDirect. You must work through a bank, broker, or dealer, and a TreasuryDirect purchase must be held 45 days before you can transfer or sell it. Buying through a broker from the start avoids that wait.
Why are TIPS usually held in a retirement account?
Because the yearly increase in TIPS principal is taxable income even though you receive no cash for it. The IRS treats that increase as original issue discount, reportable in the year it accrues. Inside an IRA or 401(k), there is no current tax, so the mismatch disappears.
How much can I buy in I bonds each year?
$10,000 in electronic I bonds per Social Security Number per calendar year, bought through TreasuryDirect. The limit resets on January 1. Two people with separate TreasuryDirect accounts each get their own $10,000 limit.
Are I bonds and TIPS exempt from state taxes?
Both are exempt from state and local income tax. Federal income tax still applies to each. The timing is what differs: TIPS are taxed every year, while I bond federal tax can be deferred until you cash the bond.
Free calculators to help you decide
Sources
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