I Bonds vs. TIPS: Which is Better?

Want To Reach FI Sooner? Join more than 18,000 others and get new tips and strategies from Can I Retire Yet? every week. Subscription is free. Unsubscribe anytime:

Inflation punishes savers by diminishing the purchasing power of the money we’ve saved. After a decade of low inflation, this topic is once again on a lot of investors’ minds. 

Man inflating dollar sign balloon

Bonds, especially those with low interest rates and longer durations, are particularly susceptible to inflation. There are bond options which can mitigate the impact of inflation: I Bonds and Treasury Inflation Protected Securities (TIPS). 

When I was building my portfolio, I elected to allocate a portion to TIPS. I did not allocate any money to I Bonds. Being someone who is  a buy and hold, set it and forget it investor, I haven’t thought much about this topic in the decade since. 

Recently I revisited the topic of I Bonds vs. TIPS, and then decided to change our strategy moving forward. It’s worth taking the time to understand the role of I Bonds and TIPS in a portfolio, the differences between them, and which better suits your investment needs.

Similarities and Differences Between I Bonds and TIPS

Let’s start with the similarities and differences between I Bonds and TIPS, which will inform which best meet your investment needs.

Bonds Sold by the US government

Both I Bonds and TIPS are bonds offered by the US government. As such, both have a low default risk. You can purchase either of them directly through the TreasuryDirect website.

Pay interest + Adjustment for inflation

Both I Bonds and TIPS have a fixed interest rate that is set at the time the bonds are issued. Each also adjusts the amount you earn based on inflation. The inflation adjustment for both I Bonds and TIPS is indexed to the Consumer Price Index (CPI). However, the method of making the inflation adjustment is different for each.

I Bonds accrue interest over 30 years or until they are redeemed. Interest is paid every six months. There is an inflation component to the interest rate that is adjusted so the total interest payment is the fixed rate plus the inflation adjustment.

TIPS are offered with 5, 10, and 30 year terms. They also have a base interest rate that is fixed over the life of the bonds. With TIPS, the principal is adjusted to inflation monthly. Interest calculations are then based on the adjusted principal.

Options to Hold to Maturity or Sell

You can hold both I Bonds and TIPS for their full term until maturity. If you don’t want to hold the bond until full maturity, the options to sell are different.

I Bonds have to be redeemed directly through TreasuryDirect. They can not be sold on the secondary market. You can not redeem your I Bond for one year after it was purchased and you lose three months interest if you redeem between one and five years after you buy it. In this way, I Bonds function more like certificates of deposit than bonds.

You can buy and sell TIPS through the secondary market at any time. In this way they function like most other bonds.

Tax Treatment

Both I Bonds and TIPS are subject to federal taxation. Both are exempt from state and local income tax. I Bonds do have a few tax advantages over TIPS.

You can defer paying federal taxes on I Bonds until the bond is redeemed or it reaches full maturity. Alternatively, you could elect to pay interest annually. In addition, I Bonds may be exempt from federal income tax if they are used to pay for qualified higher education expenses. Find details of the Education Tax Exclusion here.

TIPS are taxed differently. You will owe federal income taxes on interest payments and inflation adjustments annually, even if you don’t sell the bond or receive any income from it because the gains may occur in an upward adjustment of the principal. TIPS are not excluded from taxation if used for educational expenses.

While TIPS and I Bonds have many similarities, the differences offer advantages of one over the other depending on your circumstances. 

Advantages of TIPS

Several features of TIPS make them preferable in certain situations.


An advantage of TIPS is convenience. Upon revisiting this subject, I recalled this was the reason I initially chose them over I Bonds. You can create an account and buy both I Bonds and TIPS directly through TreasuryDirect. However, you can also conveniently buy TIPS in a bond fund through most brokerages where you already invest without setting up an additional TreasuryDirect account.

There is essentially no limit on how much money you can put into TIPS at one time. If using a TIPS fund, you’re limited only by the rules established by the particular fund. If buying TIPS directly, you may purchase up to $5 million worth at a single auction.

Conversely, you are limited to purchasing $10k per person per year of electronic I Bonds through TreasuryDirect. You could buy up to an additional $5k per person per year of paper I Bonds by overpaying your income taxes through the year and then receiving the refund in the form of I Bonds rather than cash.

If you want to slowly build a position in inflation protected bonds, buying I Bonds is a reasonable option. But if you want to reallocate a portion of a relatively large portfolio to inflation protected bonds, using I Bonds could take years.

I own TIPS in Vanguard’s Inflation Protected Securities Fund Admiral Shares (VAIPX). Rather than having to open a separate account with TreasuryDirect and taking several years to build a position, I was able to do it in seconds with a click of a button. 

Potential Price Appreciation

When interest rates decrease, the value of most bonds increase. This is because newly issued bonds offer lower yields, so the older bonds with higher yields are more valuable when sold on an open market. This is the case for TIPS.

There is no secondary market for I Bonds. Selling them means redeeming them for the face value of the bond. Therefore I Bonds offer no potential upside for price appreciation.

No Penalty if Sold Before 5 Years

It is not uncommon to want to sell your bonds before they reach full maturity. Common reasons to sell bonds are because you need money to pay for living expenses in retirement or you want to reinvest in other options with more upside.

Because there is a secondary market for TIPS, you can sell them at any time. I Bonds restrict the ability to redeem them in the first year after they are issued. You are also subject to a penalty of three months interest if you sell an I Bond within five years. Only after holding an I Bond for 5 years can you redeem it without penalty.

TIPS Are Better in Tax Advantaged Accounts

TIPS can be bought and sold in any amount at any time, making them convenient to use when rebalancing a portfolio. It is typically best to rebalance within tax advantaged accounts where you won’t owe taxes on any capital gains. 

Taxes on TIPS are due annually, making them less tax friendly in taxable accounts than I Bonds, on which you can defer paying taxes until the bond reaches maturity or you redeem it.

For these reasons, TIPS may be a better option in a tax deferred account. Conversely, they may not make as much sense in a taxable account.

Advantages of I Bonds

While TIPS are superior to I Bonds in certain situations, I Bonds have clear advantages over TIPS in other situations. This is particularly true in our current environment with extremely low interest rates.

Related: Retiring With Extreme Low Interest Rates

An Interest Rate Floor

I Bonds interest rates can not go below zero. TIPS can, and as of this writing currently do, have negative interest rates.

This means buying an I Bond with a 0% fixed interest rate plus an adjustment equal to CPI guarantees that a dollar invested today will maintain the same purchasing power relative to the CPI over the life of the bond. The only way you can lose purchasing power is if your personal rate of inflation is higher than the CPI.

Related: What Is Your Personal Rate of Inflation?

No Interest Rate Risk

As noted above, TIPS offer upside price potential when interest rates fall. The opposite side of that coin is that if interest rates go up, the value of TIPS will decrease.

I Bonds have a stable value. You can redeem them any time after 12 months from issue. Therefore, if interest rates rise, you have no risk of your bond dropping in value. With rates so low, this also makes I Bonds particularly attractive at the moment. 

You do lose three months of interest if you sell the bond <5 years after issue. Otherwise, the only thing stopping you from selling your lower yielding I Bonds and buying new ones with a higher yield if rates go up is the annual purchase limit.

Ability to Defer Taxes

I Bonds give you the option to defer taxation on interest earned or inflation adjustments until you redeem the bond or it reaches full maturity. This is not a feature of TIPS.

When you hold TIPS in taxable accounts, you owe taxes annually on both the interest earned and inflation adjustment to the principal of the bond, even if no money was received during the year.

This tax deferral feature gives I Bonds another clear advantage over TIPS when held in taxable accounts.

Tax Breaks for Education Expenses

When you redeem I Bonds for qualified education expenses they are completely tax free. This is not a feature of TIPS, making this another clear tax advantage of I Bonds over TIPS.

How I’ll Be Using I Bonds and TIPS

I Bonds are attractive compared to TIPS and other bonds at the moment. In times of very low interest rates, I Bonds eliminate the interest rate risk that is present with the alternatives. I Bonds are a better bet to at least keep up with inflation than regular bonds. Because the interest rate on I Bonds can’t go below zero, they are a strong bet to outperform TIPS which function similarly to I Bonds, but are starting with the headwind of a negative fixed interest rate.

We will continue to hold our allocation of TIPS in tax-deferred retirement accounts. In the future, rather than adding to our core bond holding or buying more TIPS, we will first look to add I Bonds to diversify our portfolio when it is feasible.

If we were still in our accumulation phase and buying bonds, we would be aggressively buying I Bonds. The challenge we currently face is finding the money to invest in I Bonds. We haven’t invested in taxable accounts since I left my job over three years ago. While I Bonds are attractive, when we have new money to invest I will continue to follow the order of operations I’ve written about in the past, prioritizing receiving the employer match on Kim’s 401(k), fully funding our HSA, and maxing out both Kim’s and my Roth IRA before investing in I Bonds.

There are two opportunities where I will be looking to purchase I Bonds.

I Bonds For Education Expenses

In the past, I shared that we bypassed using a 529 account to save for our daughter’s education fund. One reason is that we could invest for a lower cost outside of a 529. Another reason is that our relatively low income in semi-retirement makes taxable investment accounts tax friendly. Investing in a taxable account allows us to avoid the additional complexity and potential restrictiveness of utilizing a 529 plan. 

One potential downfall of our strategy is creating a tax bomb if we sell large amounts of highly appreciated taxable investments in one year, or over a couple of years, to pay for her education. Another issue is properly managing risk.

We front loaded our daughter’s education funds during her first couple years of life. The money is invested 100% in a total stock market index fund. Because of a massive tailwind since then, we’ve more than doubled our money and met our financial goal a decade before we will need the money.

One thing we will start doing later this year is selling off $10,000 of her highly appreciated index funds each year and buying her I Bonds with the proceeds. This will serve two purposes.

First, we’ll gradually harvest capital gains at a 0% long-term capital gains rate to lower our future tax burden. We’ll also put the money in a place where it will grow tax free and, if it is used for our intended purpose of helping our daughter with her higher education, we’ll access it tax free.

Second, we’ll be taking risk off the table by allocating money that currently is in volatile and richly valued stocks into more stable bonds, which should keep up with at least general inflation, if not inflation in education prices if it continues at past rates.

I-Bonds in Taxable Accounts When Rebalancing

Traditionally, we have done all portfolio rebalancing in our tax advantaged accounts. That’s because we don’t incur taxation on any short or long term capital gains that would be owed if rebalancing in taxable accounts. We’ve also avoided holding any bonds in our taxable accounts.

Now that we have a more tax-friendly lower income in semi-retirement, we can harvest gains from our taxable stock index funds at a 0% federal long-term capital gains rate. Moving forward, in years when we need to sell stocks and buy bonds to rebalance our portfolio, we’ll start selling taxable stock funds and buying I Bonds to diversify our bond holdings as long as we can do so in a tax friendly way.

Have you considered I Bonds in your portfolio? If so, how are you using them? Let’s discuss it in the comments below.

* * *

Valuable Resources

  • The Best Retirement Calculators can help you perform detailed retirement simulations including modeling withdrawal strategies, federal and state income taxes, healthcare expenses, and more. Can I Retire Yet? partners with two of the best.
  • Free Travel or Cash Back with credit card rewards and sign up bonuses.
  • Monitor Your Investment Portfolio
    • Sign up for a free Empower account to gain access to track your asset allocation, investment performance, individual account balances, net worth, cash flow, and investment expenses.
  • Our Books

* * *

[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. After achieving financial independence, Chris began writing about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. Chris also does financial planning with individuals and couples at Abundo Wealth, a low-cost, advice-only financial planning firm with the mission of making quality financial advice available to populations for whom it was previously inaccessible. Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He has spoken at events including the Bogleheads and the American Institute of Certified Public Accountants annual conferences. Blog inquiries can be sent to chris@caniretireyet.com. Financial planning inquiries can be sent to chris@abundowealth.com]

* * *

Disclosure: Can I Retire Yet? has partnered with CardRatings for our coverage of credit card products. Can I Retire Yet? and CardRatings may receive a commission from card issuers. Some or all of the card offers that appear on the website are from advertisers. Compensation may impact on how and where card products appear on the site. The site does not include all card companies or all available card offers. Other links on this site, like the Amazon, NewRetirement, Pralana, and Personal Capital links are also affiliate links. As an affiliate we earn from qualifying purchases. If you click on one of these links and buy from the affiliated company, then we receive some compensation. The income helps to keep this blog going. Affiliate links do not increase your cost, and we only use them for products or services that we're familiar with and that we feel may deliver value to you. By contrast, we have limited control over most of the display ads on this site. Though we do attempt to block objectionable content. Buyer beware.


  1. Just picked up my annual $10K iBonds last month. 3.54% for bonds issued May 2021 – October 2021. Not bad at all.

    1. I agree. It beats the pants off of getting .5% for having cash sitting in a “high yield” savings account.


  2. Bad link for education tax exclusion page on Treasury Direct.

    Regarding I-Bonds, you can purchase $20,000 per year if you buy $10,000 in your name and $10,000 in your spouse’s name. If you add the $5000 tax refund option, you can actually get to $25,000 per year. Beats the pants off any CD rate you can find today. Plus there’s no state tax.

  3. In addition to purchasing the 10k allotment, I also intentionally overpaid our taxes earlier this year to get $5k of refund in ibonds. Ibonds are a really great deal for retail investors and it is fantastic to see them discussed on this blog!

  4. A topic dear to my heart, I wrote my masters thesis comparing ibonds to tips.

    The big gotcha is the negative return potential of tips. There is a reason ibonds have a purchase limit and tips do not

    A note. Entities like trust and llc can also buy ibonds with their own limits.

        1. MB & Full Time Finance,

          Thank you both for adding to the conversation and for the valuable resources.


  5. Your statement: “You could buy up to an additional $5k per person per year of paper I Bonds by overpaying your income taxes through the year and then receiving the refund in the form of I Bonds rather than cash.” might be interpreted to mean i-bonds purchases with a tax return must be paper. I think they can also be deposited into an existing Treasury Direct account.

    1. No, that’s not quite accurate. They come in paper form, mailed to you and can’t be deposited directly from the IRS into the Treasury Direct Account. Instead, you have to send in the paper certificates after you receive them in order to have them in electronic form.

      The process is really weird. This past year I received $5000 in I-Bonds as part of my tax refund. They arrived in 12 separate envelopes, each with one bond inside. Denominations ranged from $50 to $1000, all adding up to $5000 total. Once I received them all, I was able to go to Treasury Direct and create a manifest that allowed me to mail them all in and get them added to my digital account. It worked, but it wasn’t straightforward at all.

      1. The Treasury Direct system is a real hassle to navigate the first few times; I attribute it largely to the fact that they are likely still using very dated IBM mainframe software for this area. I have had a lot of experience with the system since years ago I had a decent amount of money taken out of my paychecks for savings bonds. Many were expiring so I had to navigate this system to build the manifest, mail them in, make sure that Treasury had the correct bank info (they did not), etc. Had to write everything down for future reference since I had to talk to their agents on two different occasions over issues I was having (their tech support was excellent, btw). And I had a pleasant surprise when I computed the value of many of these bonds since a large # of them had been accruing 5-6% tax free income for years. All in the timing.

        1. MB & Chuck Yanus,

          Thank you both for sharing your experience. While I spent a good bit of time reading up on these options, I’m a newb when it comes to actually navigating the system and understanding all of these little details as I assume many others reading this will be, so those tips are very helpful.


      2. MB Walker/Chris:

        I had this same experience, getting EIGHT separate envelopes for $1,000 in i-bonds in 2019. I got one $500, one $200, and six $50.00 bonds all in separate envelopes. Seems like there should be an easy fix for this!

        I have not converted them to my digital account yet.


  6. This is great information! I have never heard of this option before. My equity ratio is right where I want it and I’m hesitant to add extra cash from my part-time work into the market (I will still max out my 403b and Roth with a part-time job). I’ll certainly add some of my 1-5 year money into this bucket. Thanks Chris!

  7. Saving money for college sounds like an enormous waste for me. The best things in life are free. There are plenty of options for very high quality education that cost nothing. Abroad and online and so on, usually available in English. Children will want to make their own decisions if they need money they can take a loan or obtain a scholarship. You shouldn’t pay for this by default. If you are able to support their decisions because you think they are smart abd worth supporting offer them a no interest loan. She will pay you back once she obtains a nice paying job or career. But don’t commit money saving for college. Maybe research the options and write about it.

    1. Martin,

      I kind of agree that the idea that “everyone needs to go to college” is oversold, which is another reason we chose to bypass a more restrictive 529 plan and instead chose to save for our daughter in a taxable account that I didn’t discuss in this post. However, if you want to become a doctor or other medical professional or enter other similar careers with specific degree and licensing requirements, good luck doing that by watching YouTube videos.

      And I agree that it is not a good idea to give an 18 y/o a blank check and send them off to schools that will gladly take it. However, my wife put herself through school by working full-time while going to school full-time, and so while we know it is possible, it is extremely stressful and hard.

      So we’ve chosen a middle ground approach of saving to help her get started in adulthood while incentivizing her to find financially responsible ways to do so. I’ve written about our approach in detail here for anyone interested: https://www.caniretireyet.com/college-vs-saving-early-retirement/


  8. Thanks for writing this Post. I thought it was a really informative article with several very helpful comments.

  9. How about VTIP (ETF) or VTAPX rather than (or to supplement) VAIPX, as they’re shorter duration and thus roll over more quickly as interest rates rise?

    1. Bill,

      You make a good point that shortening the duration of bonds is another way of decreasing interest rate risk. The flip side of that is that bonds with longer durations tend to reward you with higher interest rates. Both the total bond fund and TIPS fund I own have intermediate durations. I’m happy with the tradeoffs that come with that rather than switching back and forth between funds trying to time rates going up and down, further diversifying by also holding a shorter duration fund (or individual bonds), or accepting lower yields of holding all short duration bonds. However, it could make sense to do any of those things, particularly in this low yield environment, if you’re inclined to do so.


  10. Wonderful article, certain to help many of us. Many thanks.

    Only way it could be better is with a chart listing pros, cons and remarks on both investments.

    I have about a quarter of my savings in Vanguard TIPS and a couple months ago bought my first I-bond from Treasury Direct. Yes, I’m paranoid about inflation.

    1. Steve,

      Thanks for the constructive criticism. I’ve added that to my list of updates.

      As for paranoia over inflation, I don’t think that’s necessarily a bad thing. It’s the most likely major risk to your portfolio IMHO, so it is wise to protect against it.


  11. Great article. We’ve been buying I-bonds for about 15 years and have them in our revocable trust accounts. Wondering if we can also open personal accounts and get another $10,000 limit for each of myself and my husband. Some articles say this is possible as the limit is per entity, not per social security # or tax ID. Has anyone done this? Thanks.

  12. Is the I Bond limit $10K per SSN or $10K per tax return? Somewhere I read it was the latter (not saying it was accurate). Also, you didn’t actually say this, but some folks might infer that I Bonds can be held in tax advantaged accounts. They cannot be. Nice article!!

  13. Very helpful article! Thank you. Question: Can I buy $10,000 in I Bonds for a grandchild, using his/her social security number? If so, hat might be a possible alternative to investing in a 529 plan.

Comments are closed.