Data Notice: Rates and purchase limits cited in this article reflect 2026 data. I Bond composite rates reset every May and November. TIPS yields change daily at auction. Verify current rates at TreasuryDirect.gov.

This article is for informational and educational purposes only. It does not constitute personalized financial or investment advice. Consult a qualified professional before making investment decisions.

I Bonds vs TIPS: Comparing Inflation-Protected Investments

Both Series I Savings Bonds (I Bonds) and Treasury Inflation-Protected Securities (TIPS) are U.S. government-backed investments designed to protect your purchasing power from inflation. They share a common goal but differ significantly in how they work, purchase limits, tax treatment, and liquidity. This guide provides a side-by-side comparison so you can choose the right tool for your situation.

For broader inflation protection strategies including these and other tools, see our inflation protection in retirement guide.

Side-by-Side Comparison

Feature	I Bonds	TIPS
Issuer	U.S. Treasury	U.S. Treasury
Inflation adjustment	Composite rate (fixed + variable)	Principal adjusts with CPI
Purchase limit	$10,000/year per SSN	$10 million+ at auction
Minimum purchase	$25 (electronic)	$100
Where to buy	TreasuryDirect.gov	Brokerage or TreasuryDirect
Maturities	30 years (redeemable after 1 year)	5, 10, or 30 years
Liquidity	Cannot sell for 12 months; 3-month interest penalty if sold before 5 years	Tradeable on secondary market
Tax on interest	Federal only; can defer until redemption	Federal only; taxed annually (phantom income)
Deflation protection	Yes — composite rate floor of 0%	Yes — principal cannot fall below par at maturity
State/local tax	Exempt	Exempt
Education tax exclusion	Yes, if qualified	No

Source: TreasuryDirect — Comparison of TIPS and I Bonds

How I Bonds Work

I Bonds pay a composite interest rate that combines two components:

Fixed rate: Set when you buy the bond and remains constant for its 30-year life. The fixed rate for bonds purchased November 2025 through April 2026 is 1.20%.
Inflation rate: Adjusts every six months based on changes in the Consumer Price Index for All Urban Consumers (CPI-U). The current semiannual inflation rate is 1.39% (approximately 2.78% annualized).

The composite rate for I Bonds issued October 2025 through April 2026 is 4.03%.

Source: District Capital Management — I Bonds 2026

I Bond Rate Formula

Composite rate = Fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)

The formula includes a small cross-product term, so the composite rate is slightly more than the simple sum of fixed and inflation rates.

Purchase Limits

The $10,000 annual electronic purchase limit per Social Security number is the most significant constraint. For a married couple, the combined limit is $20,000 per year. Additional purchases through trusts, businesses, or estates each have their own $10,000 limit.

The option to purchase an additional $5,000 in paper I Bonds through tax refunds ended January 1, 2025. Only electronic purchases through TreasuryDirect remain available.

Redemption Rules

Cannot redeem before 12 months — the money is locked up for the first year
3-month interest penalty if redeemed before 5 years — you forfeit the last 3 months of interest
After 5 years — fully liquid with no penalty

How TIPS Work

TIPS adjust your principal based on changes in the Consumer Price Index (CPI). Rather than adjusting the interest rate (like I Bonds), TIPS adjust the base on which interest is calculated.

Example: You buy a $10,000 TIPS with a 2.0% coupon. If inflation is 3% over the next year:

Principal adjusts to $10,300
Your semiannual interest is 2.0% of $10,300 = $206/year (instead of $200)
At maturity, you receive the inflation-adjusted principal (or the original $10,000 if deflation occurred, whichever is greater)

Current TIPS Yields (Early 2026)

10-year TIPS real yields are approximately 2.0-2.3% above inflation. This is historically attractive — real yields averaged below 0.5% from 2010 through 2021. At a 2.0% real yield, your investment grows 2% faster than inflation regardless of what inflation does.

No Purchase Limits

Unlike I Bonds, TIPS have no practical purchase limit for individual investors. You can buy up to $10 million in noncompetitive bids at Treasury auctions, and unlimited amounts on the secondary market through a brokerage.

Liquidity

TIPS trade on the secondary market and can be bought or sold any business day through a brokerage account. TIPS ETFs (like TIP, SCHP, or VTIP) provide even more convenient access and daily liquidity.

Tax Treatment: The Critical Difference

I Bond Tax Advantage

I Bond holders can defer federal taxes on interest until redemption or maturity — potentially decades. No annual tax filing is required for the interest. When you eventually redeem, you pay federal income tax on all accumulated interest but owe no state or local tax.

Additionally, I Bond interest used for qualifying higher education expenses may be entirely tax-free if you meet income requirements.

This makes I Bonds highly tax-efficient in taxable accounts. You control when you trigger the tax event.

TIPS “Phantom Income” Problem

TIPS create a significant tax complication in taxable accounts. When CPI rises and your TIPS principal increases, the IRS taxes that increase as income in the year it occurs — even though you receive no cash until the bond matures or you sell it. This is called “phantom income.”

Example: Your $10,000 TIPS principal adjusts to $10,300 due to 3% inflation. You owe federal tax on the $300 increase in the current year, plus tax on the coupon payments, despite receiving only the coupon in cash.

This makes TIPS significantly less attractive in taxable brokerage accounts. The standard advice is to hold TIPS in tax-advantaged accounts (traditional IRA, Roth IRA, or 401(k)) where phantom income is not an issue.

Source: Bogleheads — I Bonds vs TIPS

Which Should You Choose?

Choose I Bonds When:

You have a taxable account and want to defer taxes on inflation-protected savings
You are saving for education and may qualify for the tax exclusion
Your investment amount is under $10,000-$20,000 per year (individual or couple)
You want a guaranteed floor of 0% return (no negative nominal returns)
You can lock up the money for at least 12 months (preferably 5 years)

Choose TIPS When:

You need to invest more than $10,000-$20,000 per year in inflation protection
You want liquidity — ability to sell any day at market prices
You are investing through a tax-advantaged account (IRA, 401(k)) where phantom income is irrelevant
You want to build a TIPS ladder matching specific future expenses
Current real yields are attractive (2%+ real yield is historically strong)

The Combined Approach

Many investors use both. Buy the annual I Bond maximum ($10,000-$20,000 per couple) first — it is the superior product for taxable accounts due to tax deferral and deflation protection. Then use TIPS (or TIPS funds) inside tax-advantaged accounts for any additional inflation protection needed.

For investors building a retirement portfolio, this combination provides robust inflation protection across both taxable and tax-deferred accounts. See our asset allocation guide for how to integrate these into your overall portfolio.

TIPS Funds vs Individual TIPS

For most investors, TIPS ETFs or mutual funds are simpler than buying individual TIPS at auction:

Fund	Expense Ratio	Duration	Focus
VTIP (Vanguard Short-Term TIPS)	0.04%	~2.5 years	Low interest rate risk
SCHP (Schwab TIPS ETF)	0.03%	~7 years	Broad TIPS market
TIP (iShares TIPS Bond ETF)	0.19%	~7 years	Broad TIPS market

Short-duration TIPS funds (like VTIP) are better for investors concerned about interest rate risk. Intermediate TIPS funds (like SCHP) provide more inflation protection per dollar invested but with more price volatility.

Key Takeaways

Both I Bonds and TIPS are backed by the U.S. government and protect against inflation, but they work differently
I Bonds are better for taxable accounts — tax deferral, no phantom income, and a 0% floor make them the superior choice up to the $10,000/year purchase limit
TIPS are better for large allocations and tax-advantaged accounts — no purchase limits, daily liquidity, and currently attractive real yields of 2.0-2.3%
Use both: max out I Bonds ($10,000-$20,000/year per couple) in taxable accounts, then use TIPS inside IRAs and 401(k)s
Current I Bond composite rate is 4.03% and 10-year TIPS real yield is approximately 2.0-2.3% — both are historically attractive entry points

Next Steps

Learn bond basics including duration, yields, and credit ratings
Review your asset allocation by age to determine how much inflation protection you need
Understand the tax implications of different bond holdings
Compare brokerage vs IRA accounts for optimal TIPS placement

Sources:

This article is for informational and educational purposes only. It does not constitute personalized financial, investment, or tax advice. Consult a qualified financial professional before making any financial decisions.