Inflation-linked bonds
TIPS vs I bonds: how inflation protection differs
Compare TIPS and I bonds by inflation adjustment, access to money, market-price risk, and tax timing without relying on stale rate quotes.
How the inflation adjustment works
With TIPS, interest payments use inflation-adjusted principal. With I bonds, an inflation component combines with the fixed rate to determine earnings. The Treasury’s official comparison documents the differences. A quoted TIPS real yield and an I bond composite rate are not the same kind of number.
Can you get your money out?
TIPS can be sold before maturity, but their market price can fall. I bonds have a 12-month redemption restriction and lose the last three months of interest if redeemed before five years. Check current Treasury rules before purchasing; a product that adjusts for inflation may still be unsuitable for a bill due next month.
Why a TIPS investment can show a loss
Imagine buying a tradable bond and then needing to sell after market yields rise. Buyers may pay less for its existing cash flows, even while its principal is being adjusted for inflation. That illustrates the difference between inflation indexing and price stability. The Treasury TIPS overview explains the original-principal floor at maturity. That floor is not a guarantee that every secondary-market purchase price is recovered.
Compare the complete terms
Tax timing differs: TIPS interest and positive principal adjustments generally create federal taxable income annually in taxable accounts, while I bond reporting can generally be deferred. Both have state and local income-tax exemptions on earnings under the Treasury’s stated rules. Review purchase limits and account eligibility on the official page. For a cash comparison, use the CD calculator with your own assumptions rather than treating either bond as a universal winner.
Are TIPS funds the same as holding one TIPS to maturity?
No. A fund holds a portfolio with changing market values and usually has no single maturity date at which your investment receives the individual bond’s principal-floor treatment.