I Bonds vs TIPS: Inflation Protection Compared (2026)

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Inflation eroded 22% of dollar purchasing power between 2020 and 2025. Two US Treasury products are designed to neutralize that erosion, and they do it in nearly opposite ways. I Bonds are capped at $10,000 per person per year and defer tax until you cash them. TIPS have no cap, trade like any other Treasury, and tax the inflation adjustment every year even though you do not receive it in cash. Choosing between them is mostly about account location and how much you want to protect.

Key takeaways

• I Bonds have a $10,000 annual electronic cap per Social Security number and pay a composite rate that combines a fixed rate with a six-month CPI adjustment.
• TIPS have no cap, trade in the open market, and pay a real yield plus a CPI inflation adjustment to the principal.
• TIPS create phantom income: the inflation adjustment is taxed each year as ordinary interest, even though the investor does not receive the cash until maturity or sale.
• Most investors should hold TIPS inside an IRA or Roth IRA and I Bonds in a taxable account for the tax-deferral and education-use flexibility.
• I Bonds can only be purchased through TreasuryDirect.gov; TIPS can be bought there or through any brokerage.

How I Bonds work

An I Bond is a 30-year savings bond issued by the US Treasury that earns a composite interest rate. The rate has two pieces:

• A fixed rate set at purchase and locked for the life of the bond.
• A semi-annual inflation rate based on the CPI-U index, adjusted every May and November.

As of the most recent rate reset, the composite rate is approximately 5.0%, with a fixed rate near 1.3% and a CPI component reflecting recent inflation. Both pieces compound semi-annually inside the bond. Interest accrues but is not paid out — you receive it when you redeem.

The rules

• Annual cap: $10,000 electronic per Social Security number, plus an additional $5,000 in paper bonds purchased with a federal tax refund.
• Lockup: cannot be redeemed at all in the first 12 months.
• Penalty: redemption between months 12 and 60 forfeits the last 3 months of interest.
• Tax: federal tax-deferred until redemption; state and local tax exempt at all times.
• Education exemption: if used for qualified higher education expenses and below an income cap, the interest can be fully federal-tax-free.

How TIPS work

Treasury Inflation-Protected Securities are marketable Treasury bonds whose principal is adjusted twice a year by the change in CPI-U. The coupon rate is fixed, but it is applied to the inflation-adjusted principal, so the actual dollar payment rises with inflation.

The mechanics in one example

Buy $10,000 of a 10-year TIPS with a 2% coupon. CPI rises 3% in the first year. The principal becomes $10,300. The next semi-annual coupon is 1% (half of 2%) of $10,300, or $103. The principal continues to ratchet up with CPI for the life of the bond, and at maturity you receive the inflation-adjusted principal (or the original principal if deflation has occurred, whichever is higher).

The rules

• Maturities: 5-year, 10-year, and 30-year, auctioned regularly.
• Cap: none. You can buy as much as you want in the secondary market.
• Liquidity: trade freely on the secondary market at any time.
• Tax: coupon interest taxed federally each year, and the inflation principal adjustment is also taxed federally each year as ordinary interest income, even though it is not received as cash. This is the famous phantom income problem.
• State tax: exempt.

Head to head: 2026 numbers

The phantom income problem in dollars

This is the single biggest reason TIPS belong in tax-advantaged accounts.

An investor holding $100,000 of TIPS sees CPI rise 4% during the year. The principal adjusts up by $4,000. The IRS treats that $4,000 as ordinary interest income that year, even though the cash is still locked inside the bond. At a 32% federal marginal rate, the investor owes $1,280 in tax on income they have not received. They must come up with cash from somewhere else to pay it. Inside an IRA, the adjustment compounds without that drag.

When to use I Bonds

You want a small, ironclad inflation hedge

The $10,000 cap means I Bonds will never be a major portfolio holding for most people. But filling that annual bucket for a few years builds a meaningful emergency-and-inflation reserve. A couple buying $20,000 per year for five years ends with $100,000 of inflation-protected principal plus accrued interest.

You want federal tax deferral

No 1099 arrives each year. The bond accrues quietly, and you choose when to recognize the income.

You may use it for college

The education exemption can fully eliminate federal tax on interest if proceeds pay for qualified tuition and fees, subject to income limits that change each year.

You want zero credit and zero market risk

The Treasury guarantee plus a floor at the original principal means you cannot lose nominal dollars on an I Bond. TIPS, by contrast, can lose market value if real yields rise.

When to use TIPS

You need more than $10,000 a year of inflation protection

A retiree allocating 20% of a $1.5 million portfolio to inflation-protected bonds needs $300,000 of TIPS exposure. That is not buildable through I Bonds in any reasonable timeframe.

You have tax-advantaged room

An IRA, Roth IRA, or 401(k) eliminates the phantom income problem. TIPS funds and individual TIPS held in a Roth IRA are particularly attractive: tax-free growth on the inflation adjustment, no tax on the coupon.

You want liquidity

TIPS can be sold any day the bond market is open. I Bonds are locked for at least 12 months.

Editor's pick: account setup

For I Bonds, TreasuryDirect is the only path. For TIPS, the cleanest setup is an IRA at a brokerage that offers commission-free Treasury auction participation. Opening a Traditional or Roth IRA at Fidelity or Vanguard lets you bid on TIPS auctions for zero commission, or buy a low-cost TIPS index fund like VTIP or SCHP for a one-line solution.

How to open a TreasuryDirect account

1. Go to TreasuryDirect.gov and click Open an Account.
2. Select Individual account type.
3. Enter Social Security number, address, and email. Identity verification is automatic.
4. Link a bank account using routing and account numbers. The link is one-way: TreasuryDirect cannot pull funds you did not authorize.
5. Choose a security image and password. Multifactor authentication is mandatory.
6. Buy I Bonds under BuyDirect, choosing the Series I option and the dollar amount up to $10,000.
7. For TIPS, schedule a purchase in the next auction under the same BuyDirect menu, selecting Treasury Inflation-Protected Securities.

One warning

TreasuryDirect's password recovery process is famously painful. Save the account number, the password, and the security image hint somewhere you will still have access to in ten years. Some users report needing to mail in a notarized signature form to reset access. Use a password manager.

A sample allocation

A 55-year-old with $700,000 split across a 401(k), a Roth IRA, and a taxable brokerage might allocate as follows:

What can go wrong

I Bonds: low fixed-rate vintages

From 2008 through 2022, the fixed rate on new I Bonds was often 0.0%. Bonds bought in that window earn only the CPI component, with no real return on top. Newer issues with a 1.3% fixed rate are meaningfully better. Old zero-fixed bonds remain useful but are candidates to redeem once they exit the 5-year penalty window.

TIPS: real yield risk

If real yields rise, the market price of existing TIPS falls. A TIPS bought at 0% real yield in 2021 is now worth substantially less in market terms than when issued. Holding to maturity returns the inflation-adjusted principal, but selling early can produce a loss.

Both: deflation

I Bonds cannot go below their original purchase value. TIPS principal can adjust downward during deflation but never below the original par at maturity. Either way, deflation is a non-issue for buy-and-hold investors.

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FAQ

Should I buy I Bonds or TIPS in 2026?

Most investors should hold both. Fill the I Bond cap each year for tax-deferred, state-tax-free inflation protection in a taxable account. Use TIPS inside an IRA or Roth IRA for the bulk of the inflation hedge, since the phantom income problem disappears in tax-advantaged accounts.

What is the current I Bond rate?

The composite rate resets every May and November. Recent composite rates have been near 5%, made up of a roughly 1.3% fixed rate plus a CPI-based variable component. Check TreasuryDirect.gov for the current rate before purchasing.

What is phantom income on TIPS?

The annual inflation adjustment to a TIPS principal is taxable as ordinary income in the year it occurs, even though the investor does not receive that cash until maturity or sale. This creates a tax bill without matching cash flow, which is why TIPS belong in tax-advantaged accounts.

Can I buy more than $10,000 of I Bonds per year?

Yes, but only through specific workarounds. A married couple can buy $10,000 each. Each child can have a custodial account with $10,000. A trust can hold its own $10,000. A federal tax refund can be directed into up to $5,000 of paper I Bonds. Some users layer these methods to reach $30,000 or more per household per year.

Do TIPS pay interest like a regular bond?

Yes. TIPS pay a semi-annual coupon based on the fixed real rate multiplied by the inflation-adjusted principal. The dollar amount of the coupon therefore rises with inflation.

What happens if I cash an I Bond before five years?

You forfeit the last three months of accrued interest. Redemptions are not allowed at all within the first 12 months. After five years, redemption is penalty-free.

Are TIPS better than regular Treasuries?

Only if realized inflation exceeds the breakeven rate priced into the market. The breakeven is the nominal Treasury yield minus the TIPS real yield. If inflation runs above that number, TIPS win. If it runs below, nominals win.

Can I hold I Bonds in an IRA?

No. I Bonds can only be held in a TreasuryDirect account or as paper bonds. They cannot be transferred into an IRA or brokerage.

What is the simplest way to buy TIPS?

For most investors, a low-cost TIPS index ETF like Vanguard's VTIP (short-term) or Schwab's SCHP (broad maturity) inside an IRA is the simplest one-line solution. Direct purchase at auction through TreasuryDirect or a brokerage suits investors who want specific maturities.

Are I Bonds and TIPS safe?

Both are backed by the full faith and credit of the US government. Credit risk is effectively zero. The only risks are real-yield movement (TIPS prices) and rate-vintage risk (I Bond fixed rates locked in low-fixed years).

Bottom line

Buy I Bonds in a taxable account to fill the $10,000 cap each year — the tax deferral, the state tax exemption, and the lockup-protected stable value are all useful. Buy TIPS inside an IRA, Roth IRA, or 401(k) to scale up the inflation hedge without paying tax every year on income you have not received. The two products solve the same problem from opposite ends, and most serious portfolios should own some of each.