# I Bonds vs TIPS: Which Protects More? > Series I bonds vs TIPS: how each tracks inflation, purchase limits, and tax treatment, explained in plain English. Canonical: https://christianbrinkleync.com/guides/i-bonds-vs-tips ## Quick answer Series I bonds and TIPS both protect against inflation, but they work differently. I bonds pay a combined rate with a fixed component plus inflation, and you can buy up to $10,000 per year electronically. TIPS adjust their principal with inflation and are usually bought at Treasury auctions or through funds, with taxes owed each year on the inflation adjustment. ## How I bonds work You buy them directly from TreasuryDirect and hold them at least 12 months. Cashing out before five years costs the last three months of interest. Interest is exempt from state and local tax, and federal tax can wait until you redeem. The rate resets every six months based on inflation. ## How TIPS work TIPS are marketable Treasury securities whose principal rises and falls with the consumer price index. You earn a fixed coupon rate on the adjusted principal. They can be bought at auction, on the secondary market, or through mutual funds. Like all Treasuries, they are exempt from state and local income tax. ## The tax difference I bond interest is tax-deferred until you cash them in or they mature. TIPS holders owe federal tax each year on the inflation adjustment, even though they have not received it yet. Both skip state and local tax. If you hate surprise tax bills, that annual TIPS tax matters. ## The May and November rate resets The I bond composite rate resets every May 1 and November 1. Whatever rate is in effect when you buy sticks for your first six months, then your bond picks up the new rate. People who watch inflation data sometimes time purchases around a reset, buying before a drop is announced or waiting when a rise looks likely. Either way, the fixed-rate portion of your bond never changes for its 30-year life. ## Paper bonds through your tax refund On top of the $10,000 electronic limit per person per year, you can buy up to $5,000 in paper I bonds with your federal tax refund using Form 8888. The bonds arrive by mail in your name. It's the only way to get paper bonds anymore, and it effectively raises one person's annual purchase ceiling to $15,000. ## The education tax break I bond interest can be completely federal-tax-free when you use it for qualified higher education expenses, tuition and fees at eligible schools. The bonds must be in your name, not your child's, you must have been at least 24 when they were issued, and income limits apply. It's one of the few ways to make I bond interest permanently tax-free instead of just tax-deferred. ## I bonds vs TIPS at a glance | Topic | How they compare | | --- | --- | | Inflation protection | Series I bonds: Combined fixed + inflation rate | TIPS: Principal adjusts with CPI | | Minimum holding period | Series I bonds: 12 months | TIPS: None if bought through a fund | | Tax timing | Series I bonds: Federal tax deferred until redemption | TIPS: Taxed yearly on inflation adjustments | ## Checklist - [ ] Decide whether you want a hold-to-maturity bond or a tradable security. - [ ] Open a TreasuryDirect account if you want to buy I bonds. - [ ] Compare the current I bond composite rate with TIPS yields before choosing. - [ ] Plan for the tax timing: deferred with I bonds, yearly with TIPS. ## Frequently asked questions ### Can I lose money on I bonds? No. I bonds never go below their purchase value, and the inflation component cannot drag the combined rate below zero. TIPS can lose market value if sold before maturity, but held to maturity they return at least the original principal. ### Which is better for an emergency fund? Neither is ideal, but I bonds work after the first 12 months since they hold value. TIPS prices can swing, so selling early can mean a loss. Keep true emergency money in an accessible savings account instead. ### What's the minimum purchase for each? I bonds start at $25 electronically through TreasuryDirect. TIPS start at $100 at auction or through TreasuryDirect. Both are within reach for small savers. You don't need thousands to start. ### How long do I bonds last? Thirty years. They stop earning interest at final maturity, so there's no reason to hold past that. You can cash them any time after 12 months, with a three-month interest penalty if you cash out before five years. ## Sources - [Source: TreasuryDirect I bonds](https://www.treasurydirect.gov/savings-bonds/i-bonds/) - [Source: TreasuryDirect home](https://www.treasurydirect.gov/) - [TreasuryDirect: TIPS](https://www.treasurydirect.gov/marketable-securities/tips/) - [IRS: About Form 8888, Allocation of Refund](https://www.irs.gov/forms-pubs/about-form-8888) ## Related - [Emergency fund guide](https://christianbrinkleync.com/wealth/emergency-fund-guide) - [Compound interest calculator](https://christianbrinkleync.com/tools/compound-interest) - [HYSA vs money market account](https://christianbrinkleync.com/guides/hysa-vs-money-market-account) --- Educational content only, not financial or tax advice. Published by Christian Brinkley, christianbrinkleync.com.