Both products solve the same problem. Money held in an ordinary savings account loses purchasing power when prices rise faster than the interest it earns, and the US Treasury sells two instruments built to prevent that. They get there by different routes, and the route determines who each one suits.

Rates below carry the period they apply to, because both products reset on a schedule.

I bonds move the rate

A Series I savings bond pays a composite rate built from two parts: a fixed rate set when you buy, and an inflation rate that resets every six months. For bonds issued between May 1 and October 31, 2026, the composite rate is 4.26%, of which 0.90% is the fixed component.

The fixed part is the piece worth understanding. It never changes for the life of the bond, so a bond bought in this window keeps its 0.90% floor for the full 30 years it earns interest, regardless of what inflation does afterward. The inflation component moves every six months, which means your rate changes but your principal does not.

The constraints are real:

  • You can buy $10,000 per year in electronic I bonds per Social Security Number or Employer Identification Number, with a minimum of $25.
  • You cannot touch the money for 12 months. There is no hardship exception.
  • Cash in before five years and you forfeit the last three months of interest. At the current 4.26%, that penalty costs roughly $106 on a $10,000 holding, so it is a real cost but not a punitive one.

The $10,000 annual cap is the binding constraint for most people. It makes I bonds a position you accumulate over years rather than one you establish at once.

TIPS move the principal

Treasury Inflation-Protected Securities invert the design. The interest rate is fixed at auction and never falls below 0.125%. What moves is the principal, which is adjusted against the Consumer Price Index and tracked through a daily index ratio, not a twice-yearly step.

Interest arrives every six months, calculated on the adjusted principal. So the rate stays put and the payment moves, because a fixed percentage of a growing balance is a growing number.

TIPS come in 5-, 10- and 30-year terms, with a $100 minimum in $100 increments. There is no practical cap for a household saver: non-competitive bids run up to $10 million per auction.

Deflation is handled explicitly. If prices fall, the principal declines with them, but at maturity you receive the greater of the inflation-adjusted principal or the original principal. You never get back less than you put in.

The tax trap in TIPS

This is the mechanic that surprises people, and it follows directly from the design.

When inflation raises your TIPS principal, that increase is taxable federally in the year it happens, even though the cash does not reach you until maturity. The gain is real, the tax bill is real, and the money is still at the Treasury. Practitioners call this phantom income.

I bonds sidestep it. Because the adjustment lands in the rate rather than the principal, and because you can defer reporting the interest until you redeem the bond or it matures, an I bond can go 30 years without generating a federal tax event.

One point the two share, and it is commonly misstated: interest on both is exempt from state and local income tax. That is a feature of Treasury securities generally, not a state-by-state variable, and it raises the effective yield most for savers in high-tax states. Federal income tax applies to both.

I bonds also carry a limited federal exemption when redeemed for qualified education expenses, though it phases out with income and carries conditions worth checking against your own situation before relying on it.

How the trade-offs actually fall

Neither is a growth asset, and neither should be assessed on whether it beats the stock market. Both are designed to hold purchasing power steady.

Where I bonds fit: savers who want a fixed floor that lasts three decades, who value deferring the tax bill, and for whom the $10,000 annual limit is not a constraint. The 12-month lockup means this is not emergency money.

Where TIPS fit: savers who need scale beyond $10,000 a year, want a specific maturity, or want the ability to sell before maturity through the secondary market. That flexibility carries a cost: secondary-market prices move with interest rates, so selling early can return less than the adjusted principal.

The phantom-income point in practice: holding TIPS inside a tax-deferred account such as an IRA or 401(k) removes the annual tax on principal adjustments, which is why the question of where you hold TIPS often matters more than whether you hold them. That is a general observation about how the tax treatment interacts with account types, not advice about your situation.

Both are bought through TreasuryDirect, the Treasury's own platform. TIPS can also be bought at auction or in the secondary market through a broker, where markups apply.