Comparing I Bonds to TIPS (Treasury Inflation Protected Securities)

Explaining the subtle, yet distinct differences of I Bonds and TIPS

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I Bonds vs. TIPS. Here's a comparison of the two. Henrik Sorensen / Getty Images

Treasury Inflation Protected Securities (TIPS) and I Bonds both offer principal protection and purchasing power protection by having a built-in feature to combat rising inflation risks - but they do so in different ways.

If you could buy larger quantities of them, my personal preference would be I Bonds. The amount of I Bonds you can buy in a single calendar year is capped at $10,000 per person and you have the ability to buy an additional $5,000 by directing your tax refund toward I Bonds.

On the other hand, you can buy an unlimited amount of TIPS.

Below is a side-by-side comparison of additional differences between TIPS and I Bonds.

Minimum terms of ownership

  • TIPS: Have no minimum term of ownership. You can sell them on the secondary market at anytime.
  • I Bonds: You cannot sell them until twelve months after purchase. You will forfeit three months interest if you redeem them prior to owning them five years.

Tax treatment

  • TIPS: Interest and any increase in principal from inflation adjustments will be taxed each year. In this way you can be taxed on income you have not yet received, as you do not receive an increase in the principal of the bond until you sell it. This feature makes it more tax-efficient to own TIPS in tax-deferred retirement accounts.
  • I Bonds: Interest is added to the value of the bond and only taxed upon redemption.
  • Both: Interest is subject to federal income tax, but tax-exempt for the purpose of state and local taxes.

    Performance during a time of deflation

    • TIPS: Can go down in value in a deflationary environment, but will always be worth the original principal amount at redemption.
    • I Bonds: Can never go down below the value of the bond the prior month, so any upward inflation adjustments you have received cannot be eroded by a period of later occurring deflation.

      Available terms

      • TIPS: Issued in 5, 10 and 30 year terms.
      • I Bonds: Pay interest for 30 years. You can redeem them after 12 months.

      How the inflation adjustment works

      • TIPS: Principal is adjusted by changes in the consumer price index, either up or down. The interest rate is determined at issue; the dollar amount paid will depend on principal value of the bond so if the principal is adjusted upward based on increases in inflation then a higher amount of interest will be paid out.
      • I Bonds: Variable portion of their interest rate is set every six months based on the consumer price index. This variable rate is paid out in addition to a fixed rate that is determined when the bond is issued.

      Minimum and maximum purchase amounts

      • TIPS: $100 minimum, and up to $5 million at any single auction using Treasury Direct.
      • I Bonds: $25 minimum and can be to the penny (such as $25.99,) and up to $10,000 in a single calendar year held electronically. If purchasing paper bonds from a tax refund, then an additional amount up to $5,000 is allowed.

      Where to buy and keep these investments

      • TIPS: online through Treasury Direct, or from a bank or broker. You are able to to use a noncompetitive bid and take the market yield. If you go through a bank, broker, or dealer then you can make a competitive bid to specify your desired rate.  You may not get want you want.

      Additional details can be found at Treasury Direct's website page Comparing TIPS and Series I Savings Bonds.