I Bonds vs. TIPS: Which Inflation Hedge Actually Makes Sense

Series I Savings Bonds and Treasury Inflation-Protected Securities show up in the same conversation constantly, and for good reason: they're the two mainstream ways to hold money that keeps pace with inflation without touching the stock market. Bogleheads.org has a dedicated wiki page just comparing the two, and the question "why hold TIPS at all, why not just buy I bonds" resurfaces on that forum every time rates move.

The confusion is understandable. Both are issued by the U.S. Treasury. Both adjust for inflation. Both are about as close to risk-free as an investment gets. But they solve different problems, and picking the wrong one for your situation costs you money in ways that aren't obvious until you've already committed the cash.

How each one actually works

An I bond pays a composite rate made of two pieces: a fixed rate, set when you buy the bond and locked in for its entire 30-year life, and an inflation rate, which resets every May 1 and November 1 based on the most recent six months of CPI-U data. Your money grows inside the bond. There's no separate interest payment; the value just compounds, and you get the whole thing when you cash it out.

For bonds issued between May 1, 2026 and October 31, 2026, the numbers are: a 0.90% fixed rate and a 1.67% semiannual inflation rate, combining to a 4.26% composite rate for the first six months you hold the bond (TreasuryDirect, I Bonds Interest Rates page). The math behind that combination is public and worth seeing once:

Composite rate = fixed rate + (2 × semiannual inflation rate) + (fixed rate × semiannual inflation rate)

= 0.90% + (2 × 1.67%) + (0.90% × 1.67%) = 0.90% + 3.34% + 0.015% ≈ 4.26%

That fixed-rate component has been drifting down. It sat at 1.30% through most of 2023 and 2024, dropped to 1.10% in May 2025, and has held at 0.90% for two rate periods running through November 2025 and May 2026 (tipswatch.com, tracking Treasury's official rate announcements). Still well above the 0.00% fixed rate that was standard for most of 2008 through 2022, but not the deal it was three years ago.

A TIPS bond works differently. You buy it at auction with a fixed real yield (currently around 2.4% for 10-year TIPS and 2.2% for 5-year TIPS, as of late August 2026; these move daily, so treat that as a snapshot, not a forecast). The bond's principal then adjusts up and down with CPI-U, on roughly a three-month lag. You receive a semiannual coupon payment calculated on the current, inflation-adjusted principal, not the original face value. At maturity, you get back the greater of the inflation-adjusted principal or your original investment, which means TIPS can't return less than face value even through a period of deflation.

Both bonds are backed by the same government and tied to the same inflation index. The differences that matter are everywhere else.

Purchase limits: the first thing that rules one out

I bonds cap out at $10,000 per person per calendar year, purchased electronically through TreasuryDirect. There used to be a way to add another $5,000 by directing a portion of your tax refund into paper I bonds, but Treasury discontinued that option; paper I bonds have not been available through a tax refund since January 1, 2025 (confirmed via TreasuryDirect's IRS tax feature FAQ and reported by Kiplinger). So $10,000 per person, per year, full stop.

TIPS have no such ceiling. You can buy them in $100 increments at auction through TreasuryDirect, through a brokerage account, or on the secondary market, in whatever amount fits your allocation. If you're trying to shelter $50,000 or $200,000 from inflation, I bonds simply can't hold it all. TIPS can.

Liquidity: locked up vs. tradeable

I bonds can't be redeemed at all for the first 12 months, no exceptions. Cash one out before you've held it 5 years, and you forfeit the most recent 3 months of interest as a penalty (confirmed current on TreasuryDirect's FAQ page). After 5 years, no penalty at all.

TIPS held to maturity behave similarly to any bond: you get your money on a fixed schedule. But unlike I bonds, they trade on the secondary market, so you can sell before maturity if your plans change. The tradeoff is price risk: since a TIPS bond has a fixed real yield set at auction, its market price moves when prevailing real yields move, meaning you could sell for more or less than you paid depending on where rates have gone. An I bond, by contrast, never loses nominal value; it just grows more slowly if the fixed rate at issuance was low.

The tax difference that actually decides this for most people

Both I bonds and TIPS interest are exempt from state and local income tax and taxable at the federal level, so that part is a wash. The real divide is in when you owe the tax.

I bonds let you defer everything. You don't owe a dime in tax until you redeem the bond or it reaches final maturity at 30 years, whichever comes first. All the growth compounds tax-deferred the entire time you hold it, similar to how a traditional IRA works, except there's no early-withdrawal penalty on the tax side (only the 3-months-interest penalty described above, and only before 5 years).

TIPS create what's usually called phantom income. Because the bond's principal adjusts for inflation every period, and the IRS treats that adjustment as taxable original issue discount under Notice 2011-21, you owe federal tax on the inflation adjustment in the year it happens, whether or not you've actually received that money. You get a 1099-OID reporting it.

Here's what that looks like with real numbers. Say you hold $20,000 in TIPS in a taxable brokerage account, and CPI runs 3% for the year (an assumption for illustration, not a forecast). Your principal adjusts up to roughly $20,600. That $600 of inflation adjustment is taxable income for the year, even though you won't see that $600 in cash until the bond matures or you sell it. At a 24% federal bracket, that's about $144 of tax owed on money you don't actually have in hand yet. Your semiannual coupon payments do provide some real cash to cover it, but in a year with a large inflation adjustment, the tax bill can outrun the cash you've actually received.

Holding TIPS or a TIPS fund inside a Roth IRA, traditional IRA, or 401(k) eliminates this problem entirely, since nothing inside those accounts is taxed until withdrawal (or never, for a Roth). It's a common enough issue that Bogleheads.org has a recurring thread specifically about whether a TIPS ETF avoids the problem (it doesn't; the fund passes the same inflation-accrual character through to you, just packaged differently). The fix is where you hold it, not which product you buy.

A side-by-side worked comparison

Take $10,000 to invest for inflation protection, held in a regular taxable account, assuming 3% inflation for the year and a 24% federal bracket, with a 9% state tax rate for the I bond comparison to show the state-tax-exemption effect:

That last row matters right now. TIPS real yields are running well above the I bond's fixed rate component, which means someone buying today locks in a meaningfully higher real return with TIPS, at the cost of taking on price risk if they need to sell before maturity and dealing with the phantom income issue if they hold it in a taxable account.

Which one actually fits your situation

I bonds make sense if you're protecting an amount at or under the $10,000 annual cap, you want the tax deferral and simplicity of not dealing with a 1099-OID every year, and you're comfortable locking the money up for at least a year. They're a strong fit for a portion of an emergency fund's inflation-protected tier, assuming you're not planning to touch that specific slice within 12 months.

TIPS make sense if you need to protect more than $10,000, if you have space in a tax-advantaged account to avoid the phantom income problem, or if the current real yield gap is attractive enough to accept the tradeoffs. They also fit better for money tied to a longer, specific horizon like a portion of a retirement portfolio, where you can hold a bond ladder to maturity and never worry about the secondary-market price at all.

Most people who care about inflation protection at all end up using both eventually: I bonds for the first $10,000 a year of tax-deferred, simple protection, and TIPS (ideally inside an IRA or 401(k)) once the amount they want to protect exceeds what I bonds can hold. If you're still deciding how much cash to hold before any of this matters, how much cash is too much is the place to start, and where to keep cash generally covers the shorter-horizon options that sit alongside this decision.

Whichever you choose, the balance shows up the same way on your net worth: as a fixed-income asset, growing slowly and predictably. If you track your full financial picture in Steady Wealth, it rolls up into your allocation alongside everything else, regardless of which Treasury product it's sitting in.

Frequently asked questions

Are I bonds better than TIPS right now?

Neither is universally better. I bonds currently carry a lower real (fixed rate) component than TIPS, but offer full tax deferral and total simplicity, with a $10,000 annual cap. TIPS currently offer a higher locked-in real yield and no purchase limit, but come with phantom income tax exposure in a taxable account and price risk if sold before maturity.

Can I lose money with TIPS?

If you hold to maturity, no. Treasury guarantees you'll receive at least the original face value even if deflation occurs. If you sell before maturity on the secondary market, yes, you can receive less than you paid if real yields have risen since your purchase, pushing the bond's market price down.

What happens to I bonds or TIPS during deflation?

An I bond's composite rate has a floor of 0%, so its value never declines in nominal terms, though it also won't grow during a deflationary stretch beyond the fixed rate. A TIPS bond's principal can adjust downward during deflation, but Treasury guarantees repayment of no less than the original face value at maturity, so the deflation risk is capped, not eliminated, if you need to sell early.

How much can I actually invest in each one?

I bonds: $10,000 per person per calendar year, electronic purchase only through TreasuryDirect. TIPS: no annual limit, purchased in $100 increments through TreasuryDirect, a brokerage account, or the secondary market.

Is it better to hold TIPS in a taxable account or an IRA?

An IRA or 401(k) avoids the phantom income problem entirely, since nothing is taxed until withdrawal (or never, in a Roth). If you only have space in a taxable account, an I bond is usually the simpler choice for that portion, precisely because it avoids the annual 1099-OID reporting that TIPS create.