I-bonds vs TIPS: two flavors of inflation protection

The US Treasury sells two products that promise the same headline — your money keeps up with inflation — through entirely different machinery. Series I savings bonds and Treasury Inflation-Protected Securities (TIPS) differ in how you buy them, how much you can buy, how they're taxed, and how they behave when you need the money. Picking the wrong one for the job is a common, quiet mistake.

How each one works

An I-bond is a savings bond: you buy it from TreasuryDirect, it earns a composite rate — a fixed rate set at purchase plus an inflation rate that resets every six months — and its value only ever goes up. It never trades on a market, so it has no price risk at all. TIPS are marketable bonds: their principal is adjusted with CPI, they pay a fixed coupon on that adjusted principal, and they trade daily — which means their price moves with real interest rates, sometimes a lot.

The differences that decide it

• Purchase limits: I-bonds cap at $10,000 per person per year electronically (plus up to $5,000 via tax refund). TIPS have no practical limit.
• Liquidity: I-bonds are locked for 12 months, and redeeming within 5 years costs the last 3 months of interest. TIPS can be sold any day — at whatever the market price is.
• Price risk: I-bonds can never lose value. TIPS lost over 10% in 2022 despite high inflation, because real rates rose faster.
• Deflation: I-bond composite rates can't go below zero. TIPS principal can adjust downward with deflation (though you get at least face value at maturity).
• Taxes: both are state-tax-free. I-bonds are tax-deferred until redemption — federal tax only when you cash out. TIPS generate taxable 'phantom income' each year on inflation adjustments you haven't received in cash.
• Where they live: I-bonds only at TreasuryDirect, never in an IRA. TIPS fit in any brokerage account, including IRAs — where the phantom income problem disappears.

Which job calls for which tool

I-bonds are the perfect slow-money vehicle: emergency-fund overflow, savings for goals 2+ years out, a supplement to cash that can never show a loss. Their weakness is the $10,000 annual limit and the fact that they can't live in retirement accounts. TIPS are the portfolio-scale tool: retirees can build TIPS ladders that guarantee inflation-adjusted spending for decades, and funds like short-term TIPS ETFs give inflation protection in any account at any size. Their weakness is real-rate volatility — held loosely, they can disappoint exactly when inflation headlines peak.

The TIPS trap to know about

TIPS protect against inflation only if held to maturity or bought as a duration-matched ladder. A long-term TIPS fund is dominated by real interest rate risk in the short run — in 2022, inflation hit 9% and long TIPS funds lost double digits. That's not a defect; it's duration. If you want spending protection, match maturities to spending dates (or use a short-duration TIPS fund). If you want a line on a chart that goes up with CPI headlines, TIPS funds will break your heart.

The bottom line

I-bonds: capped, locked for a year, but zero-risk, tax-deferred, and gloriously boring — ideal for personal savings. TIPS: unlimited, IRA-friendly, and ladder-able into genuine decades-long inflation insurance — but volatile when held as a loose fund and tax-clumsy in taxable accounts. Most households do it in this order: fill the I-bond allowance in high fixed-rate years, hold TIPS inside retirement accounts, and never confuse either with a bet on next month's CPI print.

A concrete pairing that uses both well

The instruments cooperate better than they compete. A household with $150,000 of long-term safe money might put $20,000 into I bonds over two Januaries ($10,000 per spouse per calendar year, the annual purchase cap), treating them as a never-loses-nominal-value inflation reserve that doubles as a second-tier emergency fund after the first twelve months of mandatory holding. The remaining $130,000 goes into a TIPS fund or ladder inside an IRA — no purchase caps, real yields near 2% in late 2025, and full protection from the phantom-income tax problem because the account is sheltered. Deflation, inflation, or anything between, the pair covers it: I bonds can never lose a cent of principal even in deflation, while TIPS at today's positive real yields lock in purchasing-power growth that I bonds' 0-ish fixed rates cannot match. The common mistake is treating the choice as all-or-nothing when the caps practically force the hybrid anyway.