Series I Savings Bonds vs. TIPS - SmartAsset

If you’re looking for an investment option that is less volatile than the stock market, your options aren’t limited to savings accounts. Both TIPS and Series I savings bonds are investments that help you protect your principal while earning over a period of time. Both are safer investments that don’t carry the reward potential of more risky investments. Below we analyze how each works and cover which one might be the right option for you. Keep in mind that investing can be a very personalized activity that requires specific advice for your unique financial position. This is why you may want to first speak to a financial advisor before deciding to invest in either.

What Are Series I Savings Bonds?

Series I Savings Bonds are a low-risk savings product that you can purchase directly from TreasuryDirect. This website allows investors to buy Treasury securities directly from the U.S. government. Series I savings bonds earn interest throughout their lifetime and are protected from inflation.

Here are how the bonds work for each of the major components:

Earnings: I bonds have an annual interest rate that has two parts. One part comes from a fixed rate, and the other part comes from a semiannual inflation rate. These bonds earn interest monthly, though it isn’t paid out to investors until the bond is redeemed. Series I savings bonds earn interest for up to 30 years.
Redemption: You can’t redeem I bonds until you have owned them for at least one year. However, if you redeem them after fewer than five years, you give up the previous three months of interest. After five years, there is no such penalty for redemption.
Taxes: Series I bonds don’t pay their earnings to investors until they are redeemed. This means investors don’t pay taxes on earnings until redemption. Thus, I bonds can be held in a taxable account without worrying about tax consequences, at least until the year of redemption. When redeemed, Series I bonds are subject to federal income tax, but not state or local income tax.
Purchase Limits: I bond purchases are limited to $10,000 per calendar year, per Social Security number. There is an additional $5,000 limit of paper bonds if you use your tax refund to buy them.

What Are TIPS?

Treasury Inflation-Protected Securities (TIPS) is a Treasury security designed to provide inflation protection. With TIPS, the principal or face value fluctuates according to inflation (or deflation), measured by the consumer price index (CPI). Then when TIPS mature, you are paid the adjusted or original principal – whichever is higher. TIPS are purchased at auction through TreasuryDirect and through banks, brokers and dealers.

Here is how each of the major components of TIPS works:

Earnings: TIPS receives interest payments twice per year; payments on TIPS are based on the interest rate set at auction. The principal amount will adjust according to inflation, which in turn determines the interest payment.
Redemption: Unlike I bonds, TIPS are marketable securities, meaning they can be sold on the secondary market, such as through a broker. Because of this, the restrictions around redeeming after a certain number of years are not as important for TIPS. However, they do have terms of 5, 10 and 30 years.
Taxes: Inflation adjustment and interest payments on TIPS are taxable every year, even if you haven’t yet sold them and received your income from the security. This can be mitigated by holding TIPS in a tax-deferred account, but those accounts may also have annual limits. Hence, the tax treatment of I bonds is generally preferable to that of TIPS.
Purchase Limits: There are both competitive and non-competitive auctions for TIPS. Non-competitive auctions have a limit purchase limit of $5 million per auction. Competitive auctions have a limit of 35% of the offering amount. It’s worth noting that I bonds can only be purchased by individuals, while both individuals and institutions such as mutual funds can purchase TIPS. This may help explain the large difference in purchase limits.

Should You Buy I Bonds or TIPS?

There is no simple answer to whether you should buy I bonds or TIPS. Both I bonds and TIPS have their strengths and weaknesses. Notably, I bonds have a favorable tax treatment, while TIPS have much higher purchase limits. Let’s take a closer look at which option might be a good fit for you.

You should consider buying I Bonds during periods of inflation because it offers one of the safest and highest inflation-adjusted yields available. You also won’t be on the hook for any tax payments until you sell the bond because the product doesn’t make regular interest payments. However, if you have a lot of capital to deploy then this might not be the best option because you’re limited to buying $10,000 per year, or $15,000 if the last $5,000 comes from tax refunds.

TIPS offer a layer of inflation protection as well but the principal values, and not their interest rates, are adjusted to incorporate inflation. There are pretty much zero purchase constraints with TIPS, giving you the ability to invest quite a bit if you’d like to. TIPS is also a better option if you’re looking for the investment to be more liquid than a Series I Bond allows.

While you can always buy both, the one you should prioritize depends on your situation and goals. It is always a good idea to meet with a financial advisor before making a final decision.

The Bottom Line

I Bonds and TIPS are two Treasury securities you can purchase directly through TreasuryDirect. TIPS, however, can also be purchased on the open market, such as through a broker. Both I bonds and TIPS provide inflation protection for individuals – or for institutions, in the case of TIPS. Both have advantages for investors and can strengthen a portfolio, regardless of economic conditions.

Tips for Investing

A financial advisor can guide you through major financial decisions, like determining your investing strategy. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Deciding how to invest can be a challenge, especially when you don’t know how much your money will grow over time. SmartAsset’s investment calculator can help you estimate how much your money will grow to help you decide which type of investment is right for you.