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 to the rate of inflation on a daily basis 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. The 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 increased amount. If the principal is equal to or lower than the original amount, you get the 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 both because it earns interest and because the principal value gets bigger. Unlike TIPS, you choose whether to report 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 rate of interest 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. Rate changes for your bond occur every 6 months from the issue date of your bond.
I-bonds earn interest monthly and it is 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 both because it earns interest and because the principal value gets bigger.
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 offer 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 way to go. 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. TIPS and I-bonds offer you two great ways to safely save for the future.
Related content
FAQs
TIPS offer 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 way to go.
Are tips a good investment in 2024? ›
TIPS may be a sound investment to protect against inflation, but they're not wealth-building tools like stocks. March 22, 2024, at 3:47 p.m. If you're worried about inflation, TIPS can be a good choice – just don't count on them for big gains.
Is there a downside to I bond? ›
The cons of investing in I-bonds
There's actually a limit on how much you can invest in I-bonds per year. The annual maximum in purchases is $10,000 worth of electronic I-bonds, although in some cases, you may be able to purchase an additional $5,000 worth of paper I-bonds using your tax refund.
Is now a good time to buy tips? ›
The best time to buy TIPS is when you expect inflation to increase. Since the principal on TIPS is adjusted upward for inflation, you'll receive a higher return than you may with other securities. This adjustability can make TIPS prices volatile. In 2022, the average TIPS fund lost 9.5%.
Why buy I bonds over tips? ›
On the other hand, if the real interest rate goes up, I-Bonds can be redeemed at accrued value anytime after you've held them for at least 12 months (you'd lose the last three months' interest if redeemed prior to five years), while TIPS go down in value. Advantage: I-Bonds.
Why are tips better than I bond? ›
I bonds and EE bonds must be bought and sold directly through the Treasury. TIPS can be bought and sold through the Treasury as well as on the secondary securities market via banks, brokers and dealers, making them more liquid.
What is the downside of tips? ›
Lower yield: TIPS usually pay lower interest rates than other government or corporate securities, so they are not necessarily optimal for income investors. Their advantage is mainly inflation protection, but if inflation is minimal or nonexistent, then their utility decreases.
What is the disadvantage of tips? ›
Cons of Investing in TIPS:
TIPS typically pay lower interest rates than other securities, so they aren't the best choice for an investor with a fixed income. TIPS also comes with an interest rate risk. During deflation, the investor will either lose the interest earned or not earn anything.
Why are tips not performing well? ›
And just like conventional Treasury bonds, TIPS are impacted by movements in the interest rate marketplace. 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.
What happens to I bonds if inflation goes down? ›
If inflation runs hotter, the rate can go up. If inflation cools off, the rate can go down. The fixed rate portion of an I Bond remains with the life of the bond. The fixed rate is 1.3% for I Bonds issued from November 2023 through April.
Call risk is the likelihood that a bond's term will be cut short by the issuer if interest rates fall. Default risk is the chance that the issuer will be unable to meet its financial obligations. Inflation risk is the possibility that inflation will erode the value of a fixed-price bond issue.
Can I buy $10,000 I Bond every year? ›
That said, there is a $10,000 limit each year for purchasing them. There are several ways around this limit, though, including using your tax refund, having your spouse purchase bonds as well and using a separate legal entity like a trust.
Why are my tips losing money? ›
TIPS are a type of Treasury security whose principal value is indexed to inflation. When inflation rises, the TIPS' principal value is adjusted up. If there's deflation, then the principal value is adjusted lower.
Should I buy tips or Treasuries? ›
TIPS should perform better in a rising interest rate environment than conventional Treasury bonds because their inflation adjustments provide better price protection, but only when rates are rising as a result of increasing inflation.
Are tips a good investment for retirees? ›
For those preparing for or already in retirement, this is especially good news. Buying individual TIPS that mature across different years — a strategy known as building a TIPS ladder – can help you lock in a stream of inflation-adjusted income for as long as 30 years.
Do tips pay a higher interest rate than other treasury bonds? ›
It's important to know that inflation protection comes at a cost, as most of these securities carry lower interest rates than other similar government bonds. Also, bear in mind that at the time of maturity, bondholders are paid the inflation-adjusted principal or original principal, whichever is greater.
Are I bonds the best investment? ›
I bonds can be a safe immediate-term savings vehicle, especially in inflationary times. I bonds offer benefits such as the security of being backed by the full faith and credit of the U.S. government, state and local tax-exemptions and federal tax exemptions when used to fund educational expenses.
Are I bonds worth buying now? ›
The current inflation interest rate of 5.27% makes I Bonds attractive for savvy investors. Note that the actual rate you'll likely get will be less than that since you'll likely forfeit 3 months' worth of interest. If you want a guaranteed investment to protect your cash from inflation, you can consider I Bonds.
What is the current 5 year tips rate? ›
Basic Info. 5 Year TIPS/Treasury Breakeven Rate is at 2.43%, compared to 2.44% the previous market day and 2.20% last year.
