I Bonds and TIPS: How to Protect Your Savings from Inflation

Inflation is the silent tax on savings. When prices rise 4% per year and your savings account earns 0.5%, you're actually losing purchasing power every month. After a decade, $10,000 in a low-yield account buys meaningfully less than it did when you first deposited it.

Two government-backed securities are specifically designed to solve this problem: Series I Savings Bonds (I Bonds) and Treasury Inflation-Protected Securities (TIPS). They work differently and serve different purposes, but both are worth understanding.

What Causes Inflation and Why It Matters

Inflation is measured by the Consumer Price Index (CPI), which tracks the average price change for a basket of goods and services — housing, food, transportation, medical care, and more.

From 2022-2023, the US experienced its highest inflation in 40 years, peaking above 9%. Even at more normal levels of 2-3%, inflation meaningfully erodes purchasing power over decades. A dollar in 2000 buys roughly 60 cents worth of goods today.

For savings held in cash or low-yield accounts, this is a real problem. Inflation-protected securities address it directly.

Series I Savings Bonds: The Basics

I Bonds are savings bonds issued directly by the US Treasury that earn interest based on two components:

Fixed rate: Set when you buy the bond, stays constant for the life of the bond (up to 30 years). Currently near historical lows.

Inflation rate: Adjusted every six months based on changes in the CPI. When inflation is high, this rate is high. When inflation is low, this rate is low.

The composite rate combines these two components. During peak inflation in 2022, I Bonds were paying over 9.6%. At normal inflation rates, they might pay 3-4%.

You can check current rates at TreasuryDirect.gov — rates are announced every May 1 and November 1.

I Bond Rules and Limits

The $10,000 annual limit is the biggest constraint. You can't pour a large lump sum into I Bonds. But a couple can put $20,000/year combined, plus up to $10,000 for each child (in their own accounts).

A strategy used by some investors: set your tax withholding slightly high to generate a refund, then direct up to $5,000 of that refund to paper I Bonds — buying an additional $5,000 on top of the $10,000 electronic limit.

When I Bonds Make Sense

Emergency fund supplement: I Bonds work well for money you won't need for at least a year. After the 12-month lockup and past the 5-year mark, they're fully liquid with no penalty. If your emergency fund is well-established and you have a year-plus buffer, shifting some of it to I Bonds makes the fund inflation-protected.

High-inflation environments: When inflation is running above yields on CDs and high-yield savings accounts, I Bonds can be the highest-yielding safe savings vehicle available.

Tax-deferred savings outside retirement accounts: Since I Bond interest is federally taxable but state-exempt — and you don't owe federal taxes until you redeem — they can be useful for building a tax-deferred cash cushion.

Education savings: Interest on I Bonds used for qualified education expenses may be completely federal-tax-free (subject to income limits).

When I Bonds Don't Make Sense

• You need the money within 12 months
• You want diversified inflation-protected exposure (TIPS funds are better for this)
• The inflation rate drops below high-yield savings account rates (then HYSAs win)
• You've already hit the $10,000 annual limit and want more exposure

TIPS: Treasury Inflation-Protected Securities

TIPS are conventional Treasury bonds with a twist: the principal adjusts with inflation. Here's how:

• You buy a TIPS bond with a face value of $1,000
• Every six months, the principal is adjusted up or down based on CPI changes
• Your interest payment is a fixed rate applied to this adjusted principal

If CPI rises 3% in a year, your $1,000 principal becomes $1,030. A 1% coupon now pays $10.30 rather than $10.00. If CPI falls (deflation), the principal decreases, but it can never go below the original face value — you'll always get back at least what you paid.

When the TIPS matures, you receive the higher of the original or inflation-adjusted principal.

TIPS vs. I Bonds Comparison

TIPS Funds: The Practical Option

Most individual investors don't buy individual TIPS directly. They buy TIPS through bond funds:

• Vanguard Inflation-Protected Securities Fund (VIPSX/VTIP): Long-term and short-term TIPS options, low expense ratios
• iShares TIPS Bond ETF (TIP): Broad TIPS exposure, expense ratio 0.19%
• Schwab US TIPS ETF (SCHP): Similar exposure, expense ratio 0.03%

TIPS funds make sense for the portion of your bond allocation you want inflation-protected. Many financial planners recommend replacing part (not all) of conventional bond holdings with TIPS, especially for investors within 10-15 years of retirement.

The "Phantom Income" Problem with TIPS

Here's an important tax nuance: with individual TIPS, the inflation adjustment to your principal is taxable as ordinary income in the year it occurs — even though you don't receive that money until the bond matures. This is called "phantom income."

In a year with 5% inflation and a $100,000 TIPS holding, you might owe taxes on $5,000 of principal adjustments you haven't received in cash yet.

The solution: hold TIPS in tax-advantaged accounts (IRA or 401k) where phantom income doesn't generate current tax liability. I Bonds don't have this problem since the interest is deferred until you cash them in.

Building an Inflation-Protection Strategy

A practical approach for most investors:

Current Rates: Where to Check

• I Bond current rate: TreasuryDirect.gov — updated May 1 and November 1
• TIPS real yields: TreasuryDirect.gov/auctions or the Federal Reserve's website
• Breakeven inflation rate: Compares nominal Treasury yields to TIPS yields to show what inflation rate the market expects — available on FRED (Federal Reserve Economic Data)

When the breakeven rate is below your inflation expectations, TIPS look attractive. When the breakeven is high and you expect lower inflation, conventional bonds may outperform.

The Bottom Line

I Bonds and TIPS are legitimate inflation hedges backed by the US government. They're not get-rich vehicles — they're preservation tools.

The practical takeaway:

• I Bonds: Great for the first $10,000-$20,000 of inflation-protected savings. Start at TreasuryDirect.gov. Buy them early in the calendar year.
• TIPS: Better for larger allocations and retirement accounts. Use a low-cost TIPS fund rather than buying individual TIPS.

In a world where inflation erodes cash, having some portion of your savings explicitly protected against price increases is worth the small complexity cost.

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