Trying to decide if TIPS (Treasury Inflation Protected Securities) or I-bonds belong in your investment portfolio? Both TIPS and I-bonds are government-backed investments that will protect your principal while earning interest. Unlike other investments, the interest rate is periodically adjusted for inflation. Let’s dig into their benefits, risks and differences and see which option matches your needs.
What is a bond?
Bonds are IOUs issued by corporations, federal, state and local governments and their agencies. When you buy a bond, you become a creditor of the corporation or government entity; you are owed the amount shown on the face of the bond (par value), plus interest.
What are Treasury inflation-protected securities (TIPS)?
Treasury inflation-protected securities (TIPS) are designed to provide inflation protection. They are sold as five, 10 or 30-year notes that are indexed daily to the inflation rate as measured by the Consumer Price Index (CPI). Unlike other Treasury securities, where the principal is fixed, the principal of a TIPS can go up or down over its term.
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Interest and earnings. TIPS owners receive interest payments twice per year. Payments on TIPS are based on the interest rate set at auction. The principal amount will adjust every six months according to inflation, which in turn determines the interest payment.
Buying, redeeming and selling TIPS. New TIPS can be purchased at auction at TreasuryDirect or from a bank, broker or dealer. The minimum purchase is $100 and TIPS are sold in increments of $100. The price and interest rate are determined at auction. Unlike I-bonds, TIPS are marketable securities and can be resold on the secondary market before maturity.
When the TIPS matures, if the principal is higher than the original amount, you get the higher amount. If the principal is equal to or lower than the original amount, you get the higher original amount.
What are I-bonds?
Series I savings bonds (I-bonds) protect you from inflation. I-bonds earn interest based on a fixed rate and inflation rate. Your bond's value grows because it earns interest and the principal value gets bigger. Unlike TIPS, you choose to report either each year's earnings or wait to report all the earnings when you get the money for the bond. Even better, if you use the money for qualified higher education expenses, you may not have to pay tax on the earnings.
Interest and earnings. The actual interest rate for an I-bond is a combination of a fixed rate and an inflation rate. The combined rate can, and usually does, change every 6 months. The new rates are announced every May 1 and November 1, and the current I-bond rate is 4.28%. Rate changes for your bond occur every 6 months from the issue date of your bond.
I-bonds earn interest monthly and it's compounded semiannually, meaning that every 6 months, the bond’s interest rate is applied to a new principal value. The new principal value is the sum of the prior principal and the interest earned in the previous 6 months. Your bond's value grows because it earns interest and the principal value increases.
Buying, redeeming and selling I-bonds. You can purchase electronic I-bonds at any time online at TreasuryDirect. The minimum purchase is $25, and the maximum annual limit is $15,000. You may buy a maximum of $10,000 worth of I-bonds electronically and up to $5,000 of paper I-bonds. However, paper I-bonds can only be purchased using your federal tax refund.
While I-bonds mature fully after 30 years, you can cash them in after a year. If you redeem the bond in less than five years, you’ll lose the last three months of interest, but the interest accrued before that is yours to keep. There is no interest penalty for cashing in the bonds after five years. U.S. savings bonds can not be resold, only redeemed.
Three key differences:
TIPS
- TIPS can be resold on the secondary market
- TIPS can be bought in five, 10 and 30-year maturities
- You can buy up to $10 million worth of TIPS at auction and an unlimited amount in the secondary market
I-bonds
- I-bonds can not be resold
- I-bonds are sold in 30-year terms only
- I-bonds purchases have an annual limit of $15,000 total — $10,000 in electronic bonds and $5,000 in paper bonds — per Social Security number
Three key similarities:
- Interest payments are subject to federal income tax but exempt from state and local taxes
- Each is backed by the full faith and credit of the U.S. government, designed to hedge against inflation, and has a component that is adjusted in line with CPI movements
- Both TIPS and I-bonds can be redeemed after 12 months and before maturity
Bottom line
If inflation and investment safety are your chief concerns — TIPS and I-bonds deliver both. TIPS offers greater liquidity and the higher yearly limit allows you to stash far more cash in TIPS than I-bonds. If you’re saving for education, I-bonds may be the better choice. Interest earned from I-bonds may be excluded from federal income taxes if you use the money for qualified education expenses and don’t exceed income limitations. However, TIPS and I-bonds offer two great ways to save safely for the future.
Related content
FAQs
If you're saving for education, I-bonds may be the better choice. Interest earned from I-bonds may be excluded from federal income taxes if you use the money for qualified education expenses and don't exceed income limitations. However, TIPS and I-bonds offer two great ways to save safely for the future.
What is the downside to tips bonds? ›
Cons of TIPS
Lower Yield Compared to Other Bonds: TIPS typically offer lower yields compared to other types of bonds. This is because they tend to carry less risk (because they are issued by the government). Inflation Adjustment Taxation: One significant disadvantage of TIPS is the taxation of inflation adjustments.
Is an I bond the same as a tip? ›
The interest rate on I bonds is adjusted every six months depending on inflation. With TIPS, it's the principal that's adjusted. Either way, both are hedges against inflation. In contrast, an EE bond has a fixed interest rate that's determined at the time you buy it.
Are tips a good investment in 2024? ›
TIPS are more attractive if the real yield is higher than the fixed rate component on I Bonds. As of November 2024, TIPS are more attractive than I bonds because the real yield on TIPS for maturities between 5 and 17 years is 2.3% or higher. In comparison, the fixed rate component of I Bonds is only 1.3%.
Is there a downside to I bond? ›
Cons of Buying I Bonds
I bonds are meant for longer-term investors. If you don't hold on to your I bond for a full year, you will not receive any interest. You must create an account at TreasuryDirect to buy I bonds; they cannot be purchased through your custodian, online investment account, or local bank.
Are tips a good idea now? ›
Consider TIPS if you're looking for long-term inflation protection. With real yields well above zero, investors can finally earn higher income with TIPS while also helping protect against inflation over the long run. For individual TIPS holders, any potential price declines might not matter if they're held to maturity.
Do you pay taxes on tips bonds? ›
Earnings from TIPS are exempt from state and local income taxes, as are other U.S. Treasury securities. TIPS owners pay federal income tax on interest payments the same year they receive those payments, and on growth in principal in the year it occurs.
What is the interest rate on 5 year tips? ›
5 Year TIPS/Treasury Breakeven Rate is at 1.88%, compared to 1.86% the previous market day and 2.26% last year. This is lower than the long term average of 1.93%.
How long do you have to hold tips bonds? ›
TIPS are bonds issued by the US Treasury with maturities of five, 10, or 30 years. They pay a fixed rate of interest every six months, but the amount of interest varies based on any changes in the principal value.
Are I bonds a good idea for 2024? ›
September 2024 I Bond Fixed Rate is 1.30%!
If you liked having I Bonds and matching inflation then you might love having I Bonds that beat inflation over the next 30 years. The current fixed rate of 1.30% is one of the best fixed rates in the past 21 years.
TIPS pay a fixed rate of interest every six months until they mature.
What is the I bond rate for May 2024? ›
The 4.28% composite rate for I bonds issued from May 2024 through October 2024 applies for the first six months after the issue date.
Why are tips funds losing money? ›
If Treasury yields increase because of rising inflation, TIPS are hedged. But if yields increase because of rising real yields, as we have right now, TIPS are susceptible to losses. Broadly, a real yield is a bond yield minus the inflation rate. Since the onset of the pandemic, real yields on TIPS have been negative.
Are tips a good investment for retirees? ›
TIPS are Treasury Inflation Protected Securities, and they can be a terrific idea for retirement investors. TIPS pay a fixed coupon rate of interest that's lower than that of regular Treasury bonds. But the principal, or face value, of TIPS is adjusted to keep pace with changes in the consumer price index.
Do tips go down in a recession? ›
TIPS allows you to park your cash during a recession and help preserve its value. The face value of TIPS goes up or down with inflation or deflation. During a non-inflationary time, your investment earns the interest rate offered when purchased.
Are I bonds better than treasury bills? ›
For the near-term, T-bills are going to offer better yields than I Bonds. Short-term investors should favor T-bills if their investing horizon is 2 years or less.
What is the real yield on tips? ›
Definition: The “real yield” of a TIPS is its yield above official future U.S. inflation, over the term of the TIPS. So a real yield of 2.055% means an investment in this TIPS will provide a return that exceeds U.S. inflation by 2.055% for 29 years, 6 months.
What is the difference between BND and tips? ›
BND Vs TIP: Capitalization and Strategy
BND's strategy involves passive management, with the goal of closely tracking its underlying index's performance. On the other hand, TIP's strategy is centered around protecting investors from inflation by investing in TIPS.
Are I bonds worth the hassle? ›
So are I bonds worth it? Whether I bonds make sense for you depends on your goals. If you only want to beat inflation, they'll ensure that you succeed. But if their $15,000 annual investment ceiling, withdrawal restrictions and interest rate uncertainty are turn offs, there are alternatives.
