Trying to figure out the best way to protect some of my portfolio against inflation. I keep seeing people recommend both TIPS and I Bonds but I'm confused about the differences. I have about $30k I want to put somewhere inflation-protected as part of my bond allocation.
Can someone break down the pros and cons of each? When would you use one vs the other?
Good question. They're both inflation-protected but work very differently:
I Bonds (Series I Savings Bonds):
- Purchase limit: $10,000/person/year (+ $5,000 via tax refund)
- Rate: composite of fixed rate + inflation rate, resets every 6 months
- Current rate: ~3.11% (fixed 1.2% + variable 1.91% as of Nov 2025)
- Must hold at least 1 year; lose 3 months interest if redeemed before 5 years
- No secondary market -- you buy/redeem through TreasuryDirect only
- Principal never goes down (deflation protection)
- Tax: federal income tax only, no state/local. Can defer until redemption.
TIPS (Treasury Inflation-Protected Securities):
- No purchase limit
- Available in 5, 10, and 30 year maturities
- Principal adjusts with CPI; coupon rate is fixed but paid on adjusted principal
- Traded on secondary market -- price fluctuates with interest rates
- Can lose value if real yields rise (like they did in 2022)
- Can buy directly or through funds like VTIP (short-term) or VIPSX (intermediate)
- Tax: federal income tax on both coupon AND phantom income from inflation adjustment. This is annoying.
For $30k: you can only put $10k in I Bonds per year. So the rest would need to go into TIPS or you'd need to spread I Bond purchases across 3 years.
My preference: I Bonds up to the limit for their simplicity and deflation protection, TIPS fund (VTIP) for anything above that.
I'm a big I Bond fan and I've been buying the max every year since 2020. Let me add some practical experience:
The TreasuryDirect website is absolutely terrible. Like, it looks like it was built in 2001 (because it was). The login process involves a virtual keyboard and security questions from the dark ages. I'm pretty tech-savvy and it still frustrates me every time.
But once you get past that, I Bonds are great for a portion of your bond allocation. The deflation floor is underrated -- with TIPS, if we hit deflation, your principal adjusts DOWN. With I Bonds, the rate can go to 0% but your principal never shrinks.
The $10k limit is the main drawback. My wife and I each buy $10k/year so that's $20k. If you have a trust you can buy another $10k through that. And the $5k paper bonds via tax refund. So theoretically you could do $25k/year per person.
For TIPS I use the Vanguard short-term TIPS fund (VTIP) in my IRA to avoid the phantom income tax issue. DON'T hold TIPS in a taxable account if you can avoid it -- the phantom income tax is a pain.
