Quick answer
TIPS are marketable Treasuries whose principal rises and falls with the CPI-U; interest is paid on the adjusted principal. I bonds are savings bonds whose rate combines a fixed rate with an inflation rate reset every six months. I bond purchases are capped at $10,000 a year (2026) [1].
Key points
- TIPS adjust the principal for inflation; the interest rate stays fixed but is paid on the adjusted principal.
- At maturity, TIPS pay the inflation-adjusted principal or the original principal, whichever is greater.
- I bonds combine a fixed rate with an inflation rate that resets every six months, and the combined rate cannot go below zero.
- As of 2026, one Social Security number can buy up to $10,000 in electronic I bonds per calendar year.
- I bonds cannot be cashed in for 12 months, and cashing in before 5 years costs the last 3 months of interest.
#Why do inflation-protected bonds exist?
A regular bond pays fixed dollars. If prices rise, those dollars buy less — Investor.gov notes that inflation reduces purchasing power, which is a risk for anyone receiving a fixed rate of interest [2]. TIPS and I bonds are the US Treasury's two answers. Both are linked to the Consumer Price Index for All Urban Consumers (CPI-U) [1], a measure of price changes explained in what inflation is. They use that index in very different ways.
| Feature | TIPS | I bonds |
|---|---|---|
| Type | Marketable: can be bought and sold in the secondary market | Non-marketable: cannot be sold to other investors |
| How to buy | At auction via TreasuryDirect, or banks, brokers and dealers | Electronically from TreasuryDirect |
| Purchase amounts | $100 minimum, $100 steps; up to $10 million non-competitive | $25 minimum, to the penny; $10,000 per SSN per calendar year |
| How inflation is handled | Principal rises or falls with CPI-U | Rate = fixed rate + inflation rate reset every 6 months |
| Interest | Paid every six months on the adjusted principal | Added to the bond's value; paid when you cash it in |
| Term | 5, 10 or 30 years | Earns interest for 30 years |
| Getting out early | Can be sold before maturity at the market price | After 12 months; 3 months' interest lost if under 5 years |
| US taxes | Federal yes, state and local no; principal increases taxed in the year they occur | Federal yes, state and local no; can defer until redemption |
#How do TIPS protect against inflation?
TreasuryDirect sells TIPS for terms of 5, 10 or 30 years [3]. Unlike other Treasury securities, where the principal is fixed, a TIPS principal goes up with inflation and down with deflation [3]. The interest rate is fixed at auction and is never less than 0.125%, but because interest is paid every six months on the adjusted principal, the dollar amount of each payment varies [3] [4].
There is a floor at the end. When a TIPS matures, you get either the inflation-adjusted principal or the original principal, whichever is greater — TreasuryDirect states you never get less than the original principal [3] [4]. Before maturity, though, a TIPS is a marketable security: its price can move with interest rates like any other bond (see why bond prices fall when rates rise).
Worked example
Worked example: a $1,000 TIPS as prices change
A hypothetical $1,000 TIPS with a 1.5% interest rate. TreasuryDirect's method: multiply the original principal by the index ratio for the payment date to get the adjusted principal, then multiply by half the annual rate. (TreasuryDirect's own example — $1,000 at 0.125% with an index ratio of 1.01165 — gives $0.63, which we reproduced.)
- Index ratio 1.00: adjusted principal / six-month interest
- $1,000.00 / $7.50
- Index ratio 1.03 (prices up 3%): $1,000 × 1.03 × 0.75%
- $1,030.00 / $7.73
- Index ratio 1.06 (prices up 6%): $1,000 × 1.06 × 0.75%
- $1,060.00 / $7.95
- At maturity with index ratio 0.98 (deflation)
- Adjusted $980 → you receive $1,000 (the floor)
The rate stays at 1.5%, but both the principal and the interest payments grow with inflation. If prices fall, the payments shrink, but the amount repaid at maturity does not go below the original $1,000.
Calculated in Python. Hypothetical rate and index ratios; real index ratios are published by TreasuryDirect for each TIPS.
One tax detail surprises beginners. TreasuryDirect notes that inflation increases to the principal are subject to federal tax in the year they occur, even though you do not receive that money until the TIPS matures or is sold [1] [5]. Check current IRS rules for your situation; general background is in capital gains tax basics.
#How is an I bond's interest rate set?
An I bond's rate has two parts. The fixed rate is known when you buy and never changes for that bond; the inflation rate is set every May 1 and November 1 from changes in the non-seasonally adjusted CPI-U [6]. TreasuryDirect combines them with this formula: fixed rate + (2 × semiannual inflation rate) + (fixed rate × semiannual inflation rate) [6], which is algebraically the same as the formula in the Treasury's Series I regulation [7]. If deflation would push the combined rate below zero, it stops at zero [6] [7].
We checked the arithmetic in Python: 0.0090 + (2 × 0.0167) + (0.0090 × 0.0167) = 0.0425503, which rounds to 4.26% [6]. The combined rate applies for six months and then changes, so 4.26% is not what an I bond will earn over its life. A new rate is due on November 1, 2026.
#How does an I bond grow, and when can you cash it?
I bonds do not pay interest out. TreasuryDirect explains that they earn interest monthly and compound semiannually: every six months the interest earned is added to the principal, and the next rate applies to that larger value [8]. An I bond earns interest for 30 years unless you cash it in earlier [8] [7]. See compound interest explained for why growth on a growing balance matters.
$10,000 in I bonds if the 4.26% rate never changed (simplified)
- Bond value
Access is limited at first. You can cash in an I bond after 12 months, but if you cash it in before 5 years you lose the last 3 months of interest — TreasuryDirect's example is that cashing in after 18 months gets you the first 15 months of interest [8] [7]. In the simplified $10,000 example above, that would mean receiving about $10,541.04 instead of $10,652.71 at 18 months — a penalty of about $111.67 (calculated in Python at the constant 4.26% assumption).
#How much can you buy in I bonds each year?
As of TreasuryDirect's rules checked on 2026-10-03, a given Social Security Number or Employer Identification Number can buy up to $10,000 in electronic I bonds each calendar year [9]. The limit is counted by the first-named person on the bond; gift bonds count toward the recipient's limit, not the giver's; and each child has their own $10,000 limit under their own Social Security Number [9]. The $10,000 yearly cap and the gift rule are also set in Treasury regulations [10]. There is no limit on the total amount of savings bonds a person can own [9].
Since January 1, 2025, I bonds have been sold only electronically, through a TreasuryDirect account [8]. The minimum is $25, and any amount above that to the penny — TreasuryDirect's example is $36.73 [8] [7]. For TIPS there is no annual cap of this kind; non-competitive bids go up to $10 million per auction [3], bought the same way as other Treasuries (see Treasury bills, notes and bonds).
An I bond's first five years
Purchase month
Interest starts from the first day of the month you buy; the fixed rate is locked for the life of the bond.[6]
Every 6 months
Interest is added to the bond's value and a new combined rate starts to apply.[6]
Month 12
The earliest point you can cash in the bond.[8]
Before year 5
Cashing in costs the last 3 months of interest.[8]
Year 5 onward
No early-redemption penalty; the bond keeps earning until 30 years.[1]
Common beginner mistakes
Treating the current I bond rate as a fixed return
Only the fixed part is locked in. The inflation part resets every six months and can fall, so the 4.26% figure applies to one six-month period.
Putting money you may need within a year into I bonds
I bonds cannot be cashed in for 12 months. Money for near-term needs belongs somewhere you can reach, such as an emergency fund.
Assuming TIPS cannot lose value
The maturity floor protects the original principal only if you hold to maturity. Sold early, a TIPS can fetch less than you paid if interest rates have risen.
Forgetting the tax on TIPS inflation adjustments
Increases in TIPS principal are federally taxable in the year they occur, even though the cash arrives later.
What's the bottom line?
TIPS and I bonds both tie US Treasury debt to the CPI-U, but they work differently. TIPS adjust their principal, pay interest twice a year, and can be sold at market prices; I bonds adjust their rate, grow inside the bond, cannot be sold, and come with a $10,000 yearly limit, a 12-month lock-up and a 5-year interest penalty window (TreasuryDirect, 2026). Knowing those mechanics matters more than any single rate. For the basics behind both, start with what a bond is.
Frequently asked questions
What is the difference between TIPS and I bonds in one sentence?
TIPS keep a fixed interest rate and adjust their principal for inflation, and can be sold to other investors; I bonds adjust their interest rate every six months, cannot be sold, and are capped at $10,000 a year per Social Security number (TreasuryDirect, 2026).
Can I bonds lose money?
The combined rate cannot go below zero, so the bond's value does not shrink from deflation. You do give up 3 months of interest if you cash in before 5 years, and inflation-linked earnings can be low when inflation is low.
Can I buy paper I bonds?
TreasuryDirect states that as of January 1, 2025, I bonds are only available electronically, bought through a TreasuryDirect account. The IRS's Form 8888 (Rev. December 2025) also says the option to buy paper bonds with a tax refund has been discontinued [11].
Do I pay state tax on TIPS or I bond interest?
According to TreasuryDirect (checked October 2026), interest on both is subject to US federal income tax but exempt from state and local income taxes. I bond owners can choose to report interest each year or defer it until they cash in the bond.
Sources
Grade A = primary source (regulator, government agency, official rulebook or the index provider's own documents). Numbers in brackets in the text point here.
- U.S. Department of the Treasury — TreasuryDirect. Comparison of TIPS and Series I Savings Bonds (2026). Accessed 2026-10-03.A
- U.S. SEC — Investor.gov. Bonds (2026). Accessed 2026-10-03.A
- U.S. Department of the Treasury — TreasuryDirect. Treasury Inflation-Protected Securities (TIPS) (2026). Accessed 2026-10-03.A
- Electronic Code of Federal Regulations (eCFR). 31 CFR Part 356 — Sale and Issue of Marketable Book-Entry Treasury Bills, Notes, and Bonds (Uniform Offering Circular) (2026). Accessed 2026-10-03.A
- Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses (2025). Accessed 2026-10-03.A
- U.S. Department of the Treasury — TreasuryDirect. I bonds interest rates (2026). Accessed 2026-10-03.A
- Electronic Code of Federal Regulations (eCFR). 31 CFR Part 359 — Offering of United States Savings Bonds, Series I (2026). Accessed 2026-10-03.A
- U.S. Department of the Treasury — TreasuryDirect. I bonds (2026). Accessed 2026-10-03.A
- U.S. Department of the Treasury — TreasuryDirect. How much can I spend/own? (2026). Accessed 2026-10-03.A
- Electronic Code of Federal Regulations (eCFR). 31 CFR 363.52 — Annual purchase limit for book-entry Series EE and Series I savings bonds (2026). Accessed 2026-10-03.A
- Internal Revenue Service. Form 8888 (Rev. December 2025), Allocation of Refund (2025). Accessed 2026-10-03.A
This page is general education, not personal financial, tax or legal advice. Figures in worked examples are hypothetical and calculated before taxes and fees unless stated. Rules and limits change; check the linked primary sources for the current version. How we check every page.
