I-Bonds Vs. Treasury Inflation Protected Securities: What The Difference?

I-Bonds and Treasury Inflation-Protected Securities (TIPS) are investments that offer principal protection. These investments are designated to offer low-risk investment opportunity that also protects purchasing power. In addition, they both have built in features that combat fluctuating inflation rates.  Although they share similarities, these investments contain their own differences in how they are bought, taxed, the difference in their holding periods and many other factors.

What are I-Bonds?

I-Bonds are savings bonds that are issued by the US government. Because all Treasury securities are backed by the “full faith and credit” of the US government, they are considered amongst the safest investments you can make. I-Bonds are non-marketable meaning they must be purchased directly from the government and cannot be bought or sold through secondary security markets. These bonds are exempt from any state and local taxes, meaning they offer an additional benefit if you live in a high tax city or state. Owners of these bonds can wait to pay taxes when they cash in the bond. They may also pay taxes when the bond matures or when they give the bond to another owner.

I-Bonds can earn interest for up to 30 years and cannot be cashed in for at least 12 months of owning it. Cashing in an I-Bond before the 5 year holding period results in a forfeiture penalty of three months interest. Anything after 5 years is penalty free. They have a minimum contribution of $25 and a maximum of $10,000 per year. The I-Bond can be 100% tax free if you use the bond to pay for college tuition or fees. These bonds can be purchased electronically at any time online from Treasury Direct or available on paper using your tax refund.

What are Treasury Inflation-Protected Securities (TIPS)?

Treasury Inflation-Protected Securities (TIPS) also provide protection against inflation. The principal of a TIPS will increase with inflation and decrease with deflation, based on the Consumer Price Index. TIPS are marketable meaning they can be bought and sold in secondary securities markets. When a TIPS reaches maturity, it pays the greater between the adjusted principal or original principal. TIPS pay interest twice a year at a fixed rate. This rate is applied to the adjusted principal. Unlike I-bonds, TIPS have no minimum holding periods, trades like a stock and pays taxes on interest yearly. The life span of TIPS ranges from 5, 10, and 30 years. TIPS can be purchased at auction through TreasuryDirect, or through banks, brokers, and dealers.

During times of deflation, TIPS can go down in value, but they will always be worth at least the original principal amount at redemption. I-bonds will never dip below the bond’s value in the prior month. Any upward inflation adjustments received with I-bonds can not be eroded due to a later period of deflation.

Looking into purchase limits of TIPS, auction noncompetitive bidding has a limit up to $5 million. While competitive bidding has a limit up to 35% of the offering amount. I-bonds have a $10,000 limit for electronic bonds and a paper bond limit of $5,000. These limits apply to the recipient of the bond.

In terms of taxes for TIPS, semiannual interest payments and inflation adjustments that increase the principal in TIPS are subject to federal tax in the year that they occur. However, like previously mentioned are exempt from state and local income taxes.

In regards to I-bonds taxation, tax reporting of interest can be deferred until redemption, final maturity, or other taxable disposition, whichever occurs first. Similarly, to TIPS, I-bonds are subject to federal income tax, but is exempt from state and local income taxes.


Author: Clay Reynolds