Both are Treasury products built to defend against inflation, but they behave very differently. Here is how to choose between them.
Same enemy, different weapons
Inflation quietly taxes every dollar you hold, and the Treasury sells two products aimed straight at it. Series I savings bonds adjust their interest rate with inflation every six months. Treasury Inflation Protected Securities, or TIPS, adjust their principal with inflation instead. The mechanics create very different experiences for the person holding them.
I bonds: the saver’s tool
I bonds are bought at TreasuryDirect, capped at 10,000 dollars per person per year electronically, and cannot be touched for the first 12 months. Redeem within five years and you give up the last three months of interest. In exchange, the value never drops, interest is exempt from state and local tax, and federal tax can be deferred until redemption. They behave like a savings account with an inflation engine, ideal for medium term cash you refuse to let shrink.
TIPS: the investor’s tool
TIPS trade like regular Treasury bonds in any brokerage account, with no purchase cap. Their principal rises with the Consumer Price Index, and interest is paid on that adjusted principal. Because they trade on the open market, their price moves with interest rates, sometimes sharply. Held to maturity they deliver the promised inflation adjusted return; sold early, results vary. One tax quirk: the annual principal adjustment is taxable in the year it happens even though you do not receive it as cash, which is why many people hold TIPS inside retirement accounts.
The quick decision rule
Protecting savings you might spend in two to ten years, and staying under the cap? I bonds. Building an inflation hedge inside a larger portfolio, in any size, with full liquidity? TIPS, preferably in a tax advantaged account. Many households sensibly hold both for different jobs.
Frequently asked questions
Can I lose money in I bonds?
The redemption value never declines, and the composite rate never goes below zero. The real risks are the one year lockup and losing three months of interest if you cash out before five years.
Why can TIPS lose value if they are inflation protected?
TIPS trade on the market. When interest rates rise, existing TIPS prices fall, so selling before maturity can produce a loss even while the inflation adjustment works as designed.
