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When you think of inflation-protected bonds, you probably think of TIPS. But did you know that I Bonds are also adjusted for inflation? There are, however, significant differences between TIPS and I-Bonds. Treasury Direct, which has a wealth of information on U.S. bonds, has created a handy chart explaining the difference between these two investments.
| TIPS | I-Bonds | |
|---|---|---|
| Type of Investment | Marketable – can be bought and sold in the secondary securities market | Non-marketable – cannot be bought or sold in secondary securities market. Registered in names of individuals and some entities, including trusts, estates, corporations, partnerships, etc. See Learn More about Entity Accounts for full information on the entity registration types. |
| How to buy | At auction through TreasuryDirect, Legacy Treasury Direct, or through banks, brokers, and dealers. NOTE: One maturity of TIPS, the 30 year TIPS, isn’t offered in Legacy Treasury Direct | Electronic: Anytime online from TreasuryDirect. Paper: most banks, credit unions, or savings institutions |
| Purchase Limits | Auction: Non-competitive bidding: up to $5 million – Competitive bidding – up to 35% of offering amount | Electronic: $5,000 per SSN per calendar year. Paper: $5,000 per SSN per calendar year |
| Par Amount/Face Value | Minimum purchase is $100. Increments of $100. | Electronic: purchased in amounts of $25 or more, to the penny; Paper: Offered in 7 denominations ($50, $75, $100, $200, $500, $1,000, and $5,000) |
| Inflation Indexing | Inflation adjustments measured by CPI-U published monthly | Semi-annual inflation rate (based on CPI-U changes) announced in May and November |
| Discounts/Face Amount | Price and interest determined at auction | Electronic I-bonds – purchased in amounts of $25 or more, to the penny. Paper bonds issued at face amount (A $100 I-Bond costs $100). |
| Earnings Rates | Principle increases/decreases with inflation/deflation. Interest calculations are based upon adjusted principle. Fixed interest rate. | Earnings rate is a combination of the fixed rate of return, set at the time of purchase, and a variable semiannual inflation rate. |
| Interest | Semiannual interest payments are based on the interest rate set at auction. Inflation-adjusted principle is used to calculate the interest amount | Interest accrues over the life of the bond and s paid upon redemption |
| Tax Issues | Semiannual interest payments and inflation adjustments that increase the principle are subject to federal tax in the year that they occur, but are exempt from state and local income taxes | Tax reporting of interest can be deferred until redemption, final maturity, or other taxable disposition, whichever occurs first. Interest is subject to federal income tax, but exempt from state and local income taxes. Interest can also be claimed annually. |
| Life span | TIPS are issued in terms of 5, 10, and 30 years | Earn interest for up to 30 years |
| Disposal before maturity | Can be sold prior to maturity in the secondary market | Redeemable after 12 months with three months interest penalty. No penalty after 5 years |
For me, TIPS make the most sense, primarily because they are marketable. That means they can be bought and sold in the secondary market. While you can buy bonds directly from Treasury Direct, many invest in bonds through mutual funds. You can also buy individual bonds or bonds funds online from your favorite discount broker.