I Bonds vs. TIPS: Which Inflation Protection Fits Your Money

Both of these are United States Treasury products designed to do the same job: keep your money’s purchasing power intact when prices rise. They are usually compared on headline rates, which is the one comparison guaranteed to mislead, because the two numbers are quoted in different units.

An I bond rate is nominal. It already contains inflation. A TIPS yield is real. It is the return above inflation. Putting a 4.26 percent I bond next to a 2.34 percent TIPS and concluding the I bond is better is like comparing a temperature in Fahrenheit with one in Celsius.

Convert them properly and the picture at the moment is not the one most people expect.

What each one actually is

A Series I savings bond earns a composite rate made of two parts: a fixed rate set when you buy, which then applies for the life of that bond, and an inflation rate reset every six months based on the consumer price index. The Treasury resets the inflation component each 1 May and 1 November. In its 1 May 2026 announcement the Bureau of the Fiscal Service set the Series I composite rate at 4.26 percent through October 2026, with Series EE bonds earning 2.40 percent. The fixed rate component for bonds bought in that window is 0.90 percent.

That 0.90 percent is the number that matters for comparison. It is the guaranteed return above inflation, for as long as you hold the bond, and it never changes for that bond.

Treasury Inflation-Protected Securities work from the other direction. The principal is adjusted with the consumer price index, and a fixed coupon is paid twice a year on the adjusted principal. What is quoted at auction and in the market is the real yield, the return above inflation. TIPS are issued in 5, 10 and 30-year terms and trade daily in the secondary market.

The comparison nobody makes

Put both in real terms and the question answers itself with arithmetic rather than opinion. The Treasury publishes daily real yield curve rates for TIPS.

At these levels TIPS pay materially more above inflation than a newly issued I bond does, by about 1.4 percentage points at ten years.

What that means over time: 10,000 dollars compounding at 0.90 percent real for ten years becomes about 10,940 dollars in today’s purchasing power. The same 10,000 dollars at a 2.34 percent real yield becomes about 12,600 dollars. A difference of roughly 1,660 dollars in real terms, before tax, on a ten-year holding.

This relationship is not permanent. The I bond fixed rate is reset every six months and has ranged from zero to well above current levels over the years, and TIPS real yields move daily. The lesson is not that TIPS always win. It is that the comparison must be made in real terms, at the moment you are buying, and that the headline I bond rate is the wrong number to use for it.

The number that tells you whether to bother

There is a third comparison worth making, and it is the one that decides whether inflation protection is worth buying at all: TIPS against ordinary Treasuries.

Subtract the TIPS real yield from the nominal Treasury yield of the same maturity and you get the breakeven inflation rate, which is the average annual inflation over that term at which the two investments produce identical results. Above it, TIPS win. Below it, the ordinary Treasury wins.

Both curves are published by the Treasury for the same dates. On 26 August 2026 the nominal par yield curve stood at 4.37 percent for five years, 4.66 percent for ten and 5.18 percent for thirty.

So on that date the market was pricing inflation at roughly 2.3 percent a year across every horizon. Buying TIPS is a bet that actual inflation will exceed that; buying ordinary Treasuries is a bet that it will not.

This reframes the decision usefully. TIPS are not a bet that there will be inflation, since a great deal of inflation is already priced in. They are a bet on inflation being worse than expected, and, more importantly for most households, they are insurance: you give up the chance of winning that bet in exchange for a known real outcome. That is a reasonable thing to buy for money earmarked against a future cost, and a poor thing to buy because inflation has been in the news.

Liquidity is where they genuinely differ

This is the part that often decides the question regardless of yield.

I bonds cannot be redeemed at all for the first twelve months. Redeem between one and five years and you forfeit the previous three months of interest. After five years there is no penalty, and the bond continues earning for thirty years. Purchases are capped at 10,000 dollars per person per calendar year in electronic form, and they are bought only through a TreasuryDirect account.

The redemption value never falls. An I bond is worth what you put in plus accrued interest, always, which makes it behave like a savings account with a lockup rather than like a bond.

TIPS behave like bonds, because they are. You can sell them any day the market is open, in any quantity, and the price you get depends on where real yields have moved since you bought. If real yields rise, the market value of an existing TIPS falls, and selling early can lose money in nominal terms. Held to maturity, that price movement does not matter; sold early, it is the whole story.

There is no meaningful purchase limit on TIPS, which alone settles the question for anyone with more than 10,000 dollars a year to place.

What happens if prices fall

Deflation is treated differently, and neither treatment is bad.

An I bond composite rate cannot go below zero. If the inflation component is sufficiently negative, the composite rate floors at zero and the bond simply stops earning for that six-month period. It never loses value.

TIPS principal does adjust downward during deflation, so the value of the holding falls and the coupon, calculated on the adjusted principal, falls with it. At maturity, however, the Treasury pays the greater of the inflation-adjusted principal or the original par value, so an investor who bought at issue and held to maturity cannot receive less than face value.

That floor applies to par, not to what you paid. Buying a seasoned TIPS in the secondary market at a price above par, after years of accumulated inflation adjustments, means the floor sits below your purchase price. It is an edge case, and it is the one that catches people who buy individual TIPS without checking the index ratio.

Tax, which decides where each one belongs

Both are exempt from state and local income tax. IRS Publication 550 states that interest on U.S. savings bonds is exempt from state and local taxes, and that interest income from Treasury bills, notes and bonds is subject to federal income tax but exempt from all state and local income taxes. For a resident of a high-tax state that exemption is worth real money and applies equally to both.

Federal treatment is where they part company, and the difference is large.

I bond interest is federally taxable, but a cash-method taxpayer may choose to defer reporting it until the bond is redeemed. In practice that means decades of untaxed compounding and a single tax event at a time you choose. Publication 550 also describes the Education Savings Bond Program, under which interest may be excluded from income when proceeds pay qualified expenses at eligible institutions, subject to conditions including that the bond was issued after 1989 and the owner was at least 24 at purchase.

TIPS work the opposite way. IRS Publication 1212 treats the annual increase in inflation-adjusted principal as original issue discount that must be included in gross income each year, reported on Form 1099-OID. You owe tax on money you have not received and will not receive until maturity. This is the phantom income problem, and in a year of high inflation it can produce a tax bill larger than the coupon that arrived in cash.

That single asymmetry does more to place these securities than yield does.

A placement rule

1. Money you might need inside twelve months belongs in neither. An I bond is locked; a TIPS can be sold at a loss. Use a savings account.
2. In a tax-advantaged account, TIPS, and only TIPS. Phantom income is irrelevant inside an IRA or 401(k), so the higher real yield arrives without its main drawback. I bonds cannot be held in an IRA at all.
3. In a taxable account, for money you want to grow quietly for years, I bonds have a real case despite the lower fixed rate, because deferral is worth something and the redemption value cannot fall.
4. For a known liability on a known date, buy an individual TIPS maturing near that date and hold it. That is the one thing TIPS do that nothing else does: deliver a known quantity of purchasing power on a chosen day.
5. Above 10,000 dollars a year, the limit decides for you.
6. Compare in real terms every time. The I bond fixed rate resets each May and November; check it against the TIPS real yield curve on the day.

Two practical frictions

I bonds require a TreasuryDirect account, and the account opening process is rigorous in ways people find frustrating. Set it up before you need it, and record the credentials carefully.

TIPS can be bought individually at auction through TreasuryDirect or a brokerage, or through a TIPS fund. The two are not equivalent. An individual TIPS held to maturity delivers a known real return. A TIPS fund never matures, holds a rolling portfolio, and can lose value when real yields rise, which is exactly what happened to TIPS funds in 2022 while the inflation they were meant to hedge was running high. If the point of the holding is a guaranteed real outcome, the fund does not provide it.

What neither of these does

Both track the consumer price index, which is a national average of a basket that is not yours. If your costs are dominated by rent in an expensive city, by childcare, or by medical care, your personal inflation rate can diverge from the index for years at a time. These instruments protect against measured inflation, which is the closest available proxy and not the same thing.

They are also, at these yields, a way to preserve purchasing power and add a little, not a way to build wealth. A guaranteed 0.90 or 2.34 percent above inflation is a defensive return, and treating it as the core of a long-horizon portfolio is a different decision that deserves its own argument.

General information, current as of September 2026, and not personalised investment or tax advice. I bond rates reset each May and November and TIPS yields change daily; check TreasuryDirect and the Treasury yield curve before buying.