TIPS vs I-Bonds (2024)

Trying to decide if TIPS (Treasury Inflation Protected Securities) or I-bonds belong in your investment portfolio? Both TIPS and I-bonds are government-backed investments that will protect your principal while earning interest. Unlike other investments, the interest rate is periodically adjusted for inflation. Let’s dig into their benefits, risks and differences and see which option matches your needs.

What is a bond?

Bonds are IOUs issued by corporations, federal, state and local governments and their agencies. When you buy a bond, you become a creditor of the corporation or government entity; you are owed the amount shown on the face of the bond (par value), plus interest.

What are Treasury inflation-protected securities (TIPS)?

Treasury inflation-protected securities (TIPS) are designed to provide inflation protection. They are sold as five, 10 or 30 year notes that are indexed to the rate of inflation on a daily basis as measured by the Consumer Price Index (CPI). Unlike other Treasury securities, where the principal is fixed, the principal of a TIPS can go up or down over its term.

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Interest and earnings. TIPS owners receive interest payments twice per year. The payments on TIPS are based on the interest rate set at auction. The principal amount will adjust every six months according to inflation, which in turn determines the interest payment.

Buying, redeeming and selling TIPS. New TIPS can be purchased at auction at TreasuryDirect or from a bank, broker or dealer. The minimum purchase is $100 and TIPS are sold in increments of $100. The price and interest rate are determined at auction. Unlike I-bonds, TIPS are marketable securities and can be resold on the secondary market before maturity.

When the TIPS matures, if the principal is higher than the original amount, you get the increased amount. If the principal is equal to or lower than the original amount, you get the original amount.

What are I-bonds?

Series I savings bonds (I-bonds) protect you from inflation. I-bonds earn interest based on a fixed rate and inflation rate. Your bond's value grows both because it earns interest and because the principal value gets bigger. Unlike TIPS, you choose whether to report each year's earnings or wait to report all the earnings when you get the money for the bond. Even better, if you use the money for qualified higher education expenses, you may not have to pay tax on the earnings.

Interest and earnings. The actual rate of interest for an I-bond is a combination of a fixed rate and an inflation rate. The combined rate can, and usually does, change every 6 months. The new rates are announced every May 1 and November 1. Rate changes for your bond occur every 6 months from the issue date of your bond.

I-bonds earn interest monthly and it is compounded semiannually, meaning that every 6 months, the bond’s interest rate is applied to a new principal value. The new principal value is the sum of the prior principal and the interest earned in the previous 6 months. Your bond's value grows both because it earns interest and because the principal value gets bigger.

Buying, redeeming and selling I-bonds. You can purchase electronic I-bonds at any time online at TreasuryDirect. The minimum purchase is $25, and the maximum annual limit is $15,000. You may buy a maximum of $10,000 worth of I-bonds electronically and up to $5,000 of paper I-bonds. However, paper I-bonds can only be purchased using your federal tax refund.

While I-bonds mature fully after 30 years, you can cash them in after a year. If you redeem the bond in less than five years, you’ll lose the last three months of interest, but the interest accrued before that is yours to keep. There is no interest penalty for cashing in the bonds after five years. U.S. savings bonds can not be resold, only redeemed.

Three key differences:

TIPS

  • TIPS can be resold on the secondary market
  • TIPS can be bought in five, 10 and 30-year maturities
  • You can buy up to $10 million worth of TIPS at auction and an unlimited amount in the secondary market

I-bonds

  • I-bonds can not be resold
  • I-bonds are sold in 30-year terms only
  • I-bonds purchases have an annual limit of $15,000 total —$10,000 in electronic bonds and $5,000 in paper bonds — per Social Security number

Three key similarities:

  • Interest payments are subject to federal income tax but exempt from state and local taxes
  • Each is backed by the full faith and credit of the U.S. government, designed to hedge against inflation, and has a component that is adjusted in line with CPI movements
  • Both TIPS and I-bonds can be redeemed after 12 months and before maturity

    Bottom line

    If inflation and investment safety are your chief concerns — TIPS and I-bonds deliver both. TIPS offer greater liquidity and the higher yearly limit allows you to stash far more cash in TIPS than I-bonds. If you’re saving for education, I-bonds may be the way to go. Interest earned from I-bonds may be excluded from federal income taxes if you use the money for qualified education expenses and don’t exceed income limitations. TIPS and I-bonds offer you two great ways to safely save for the future.

    Related content

    TIPS vs I-Bonds (2024)

    FAQs

    Is tips better than I bond? ›

    Bottom line. If inflation and investment safety are your chief concerns — TIPS and I-bonds deliver both. TIPS offer greater liquidity and the higher yearly limit allows you to stash far more cash in TIPS than I-bonds. If you're saving for education, I-bonds may be the way to go.

    What is the downside to tips bonds? ›

    Cons of Investing in TIPS:

    TIPS typically pay lower interest rates than other securities, so they aren't the best choice for an investor with a fixed income. TIPS also comes with an interest rate risk. During deflation, the investor will either lose the interest earned or not earn anything.

    Is an I bond the same as a tip? ›

    The interest rate on I bonds is adjusted every six months depending on inflation. With TIPS, it's the principal that's adjusted. Either way, both are hedges against inflation. In contrast, an EE bond has a fixed interest rate that's determined at the time you buy it.

    Is there a downside to I bond? ›

    The cons of investing in I-bonds

    Another disadvantage to I-bonds is the fact that you have to purchase them directly from the Treasury via the website, TreasuryDirect.gov, which means you can't buy them through your brokerage with your other investments.

    Should I buy tips in 2024? ›

    April 2024, in fact, is also an opportune time for making new TIPS investments. But as this chart shows, real yields could go higher. Or, as happened in the months after October 2023, they could move sharply lower.

    Can tips bonds lose value? ›

    As the name implies, TIPS are set up to protect you against inflation. Unlike other Treasury securities, where the principal is fixed, the principal of a TIPS can go up or down over its term.

    Are tips worth buying? ›

    Consider TIPS if you're looking for long-term inflation protection. With real yields well above zero, investors can finally earn higher income with TIPS while also helping protect against inflation over the long run.

    Do you pay taxes on tips bonds? ›

    Earnings from TIPS are exempt from state and local income taxes, as are other U.S. Treasury securities. TIPS owners pay federal income tax on interest payments the same year they receive those payments, and on growth in principal in the year it occurs.

    What is the 5 year tips rate? ›

    Basic Info. 5 Year TIPS/Treasury Breakeven Rate is at 2.35%, compared to 2.36% the previous market day and 2.07% last year. This is higher than the long term average of 1.93%.

    Do I bond double in 20 years? ›

    How are Series EE and Series I savings bonds different? EE bonds earn a fixed rate of interest, but, regardless of the rate, they are guaranteed to double in value if you hold them 20 years. Series I bonds earn a variable rate of interest that is tied to inflation.

    How long do you have to hold tips bonds? ›

    TIPS are a type of medium to long-term Treasury marketable security of 5 to 30 years. They have a fixed interest rate with the value of the principal being adjusted semiannually, based upon changes in the Consumer Price Index - Urban (CPI-U).

    Do you pay tax on I bonds? ›

    How much tax do I owe on my I bonds? Interest on I bonds is exempt from state and local taxes but taxed at the federal level at ordinary income-tax rates.

    Can you ever lose money on an I bond? ›

    You can count on a Series I bond to hold its value; that is, the bond's redemption value will not decline.

    Is there anything better than an I bond? ›

    Dividend stocks can offer you a payout and the potential for appreciation over time, making them a more attractive long-term investment than Series I bonds. However, they come with more volatility and without a government guarantee that you'll get your principal back.

    What is the best way to buy tips? ›

    TIPS are available with five-, 10- and 30-year maturities. They can be purchased in increments of $100. You can buy individual TIPS directly from the U.S. government at TreasuryDirect.gov or through a brokerage firm. Or you can buy a basket of TIPS by using a mutual fund or an exchange-traded fund.

    Are tips still a good investment? ›

    Like most bond yields, TIPS yields have risen sharply over the last few years and are still near the high end of their 20-year range. More importantly, TIPS yields are positive, meaning investors who hold individual TIPS can earn a positive inflation-adjusted yield regardless of the inflation rate.

    What are the risks of tips bonds? ›

    TIPS' Price Relationship to Inflation

    Inflation risk is an issue because the interest rate paid on most bonds is fixed for the life of the bond. As a result, the bond's interest payments might not keep up with inflation.

    Which is better, treasuries or bonds? ›

    Both notes and bonds pay interest every six months and the face value is at maturity. Because of their longer maturities, Treasury bonds generally offer higher interest rates than Treasury notes to compensate investors for the additional risk of holding the securities for a longer period.

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