Key points
- TIPS, I bonds and EE bonds are debt securities issued by the U.S. Treasury Department.
- They’re backed by the full faith and credit of the U.S. government, making them lower-risk investments.
- They’re designed for long-term investing, with terms ranging from five to 30 years.
Steady returns and minimal risk are goals for many investors, and TIPS, I bonds and EE bonds offer both. Bond investing may not be as glamorous as the stock market or as thrilling as cryptocurrency, but it can be an excellent way to diversify your portfolio and secure your financial future.
We’ll take a closer look at these three government-backed securities and explore their benefits, risks and differences so you are equipped with the knowledge to make informed decisions about your investments.
What are bonds?
A bond is a type of debt security. Governments and companies use bonds to raise money. When you buy a bond, you lend money to an entity, in this case the U.S. Treasury, and that entity promises to pay you a specific interest rate for the life of the bond.
The principal, the original amount you loaned the entity, is also known as the face value of the bond. The entity will repay the face value when the bond “matures,” or the agreed-upon term of the bond comes to an end.
Want to get started? How to buy Treasury bonds
TIPS vs. I bonds vs. EE bonds
Before we jump into lengthier descriptions of these government-backed securities, here’s a high-level view of their similarities and differences.
| TIPS | I bonds | EE bonds | |
|---|---|---|---|
Definition | Government bonds that are indexed to inflation | Savings bonds that earn interest based on a fixed rate and inflation rate | Savings bonds that earn a fixed interest rate for up to 30 years |
Interest rate | Fixed interest rate plus inflation adjustment based on consumer price index | Composite rate that consists of a fixed rate and a semiannual inflation rate adjustment | Fixed interest rate that is set when the bond is purchased |
Taxation | Interest payments are subject to federal income tax but exempt from state and local taxes | Interest payments are subject to federal income tax but exempt from state and local taxes | Interest payments are subject to federal income tax but exempt from state and local taxes |
Liquidity | Can be bought and sold on the secondary market | Can’t be sold for the first year, and there’s a penalty for selling within the first five years | Can’t be sold for the first year, and there’s a penalty for selling within the first five years |
Purchase limits | $10 million for noncompetitive bids and 35% of offering amount for competitive bids | $10,000 per Social Security number per calendar year for electronic bonds and $5,000 per Social Security number per calendar year for paper bonds (through tax refunds) | $10,000 per Social Security number per calendar year for electronic bonds |
Typically used for | A hedge against inflation and a diversification tool in a portfolio | A safe long-term investment for individuals and a way to support the U.S. government | A way to save for a long-term goal, such as education or retirement |
About TIPS
Treasury inflation-protected securities, or TIPS, are bonds that provide protection against inflation.
The principal of the bond increases or decreases in line with movements in the consumer price index (CPI), a measure of the change in prices we pay for a basket of goods and services.
When the bond matures — TIPS have terms of five, 10 or 30 years — you receive either the adjusted or original face value, whichever is greater.
In the meantime, TIPS pay a fixed interest rate twice per year. But since the principal varies, interest payments rise and fall with the inflation rate. TIPS are sold in $100 increments up to a maximum of $10 million for noncompetitive bids or 35% of the offering amount for competitive bids. You can learn more about the different bid types on the TreasuryDirect website.
You can buy TIPS either directly from the Treasury or from a bank or broker. They can be held to maturity or sold before then, including on the secondary market.
About I bonds
I bonds, like TIPS, protect investors against inflation but in a different way. Instead of the principal being adjusted in line with the CPI, the interest on the bond is. In other words, the principal is fixed, but part of the interest rate is variable.
We say part because the interest rate of an I bond comprises two rates:
- A fixed rate.
- An adjustable rate that moves up or down with inflation and is set twice per year.
The interest rate on I bonds is adjusted each May and November. The rate on I bonds issued from Nov. 1, 2023, to April 30, 2024, is 5.27%, which includes a 1.30% fixed rate. On May 1, 2024, the adjustable portion of the interest rate will be recalculated based on inflation.
The bond earns interest until it reaches 30 years or you cash it, whichever comes first.
Unlike TIPS, the amount of I bonds you can buy is capped at $10,000 per calendar year, with an additional $5,000 allowed if you use your federal tax refund to buy them. Those last $5,000 are paper bonds, while the first $10,000 are electronic.
I bonds can be bought only from the Treasury. Electronic I bonds start at $25 face values and can be bought in penny increments. You can buy paper I bonds, on the other hand, in increments of $50, $100, $200, $500 and $1,000. The only way to buy paper bonds is using your tax refund.
About EE bonds
EE bonds earn a fixed interest rate and are designed to reach their face value through interest accrual, said Jack Prenter, chief executive officer at DollarWise.
The rate on EE bonds issued between Nov. 1, 2023, and April 30, 2024, is 2.70%.
They can be held for the full 30 years or sold before then. But if you hold the bond for 20 years, no matter what the rate is, the face value doubles.
You can buy $10,000 worth of electronic EE bonds per calendar year, and they must be purchased directly through the Treasury. EE bonds start at $25 face values and can be bought in penny increments.
What TIPS, I bonds and EE bonds have in common
TIPS, I bonds and EE bonds are all securities issued by the U.S. Treasury.
“They’re traditionally inserted into a portfolio as low-risk investments [that] can hedge against inflation and are seen as some of the safest investments you can hold,” said Richard Gardner, chief executive officer at Modulus.
They are backed by the full faith and credit of the U.S. government, which guarantees interest and principal payments will be made on time. And most Treasury securities are liquid, meaning they can easily be sold for cash.
TIPS and I bonds are similar in that they are designed to hedge against inflation and neither has a guaranteed return. Each has a component that is adjusted in line with CPI movements.
You can cash in I bonds and EE bonds after one year, but both lose the previous three months of interest if you cash out in the first five years. You can buy a maximum of $10,000 of each bond type per year, though you can buy an additional $5,000 of paper I bonds if you use your federal tax refund.
All are generally subject to federal income taxes but not state or local taxes.
How TIPS, I bonds and EE bonds differ
The interest rate on I bonds is adjusted every six months depending on inflation. With TIPS, it’s the principal that’s adjusted. Either way, both are hedges against inflation.
In contrast, an EE bond has a fixed interest rate that’s determined at the time you buy it. It also has a guaranteed return. After 20 years, you get double what you paid for it — and, of course, all the interest that has accrued.
I bonds and EE bonds must be bought and sold directly through the Treasury. TIPS can be bought and sold through the Treasury as well as on the secondary securities market via banks, brokers and dealers, making them more liquid.
You can invest millions of dollars at a time into TIPS but are limited to $10,000 in I bonds and EE bonds, with an additional $5,000 in I bonds if you use your federal tax return to buy them.
Tax reporting for EE bonds and I bonds can be deferred until redemption, final maturity or other taxable disposition, whichever occurs first. For TIPS, interest payments and inflation adjustments that increase the principal are subject to federal taxes in the year they occur.
Which should you invest in?
If inflation worries you, I bonds and TIPS may work for your portfolio as hedges since each has a component that moves in line with consumer prices.
Note that I bonds must be held for at least 12 months before they can be sold. If you hold them for less than five years, you will forfeit three months of interest.
You can buy more in TIPS, and their liquidity is an attractive option for some investors. Plus, TIPS pay a fixed interest rate semiannually. But note that because interest payments and inflation adjustments that increase the principal are subject to federal taxes each year, you may want to hold these investments in a tax-sheltered account like a 401(k) or individual retirement account.
If you think inflation is going to be tamed but are feeling queasy about market volatility, you may want to consider buying the very safe EE bond, which has a fixed interest rate and offers a guaranteed return that doubles your investment after 20 years. EE bonds also must be held for at least 12 months, and you will forfeit three months of interest if you hold them for less than five years.
Frequently asked questions (FAQs)
Yes, the government guarantees that EE bonds sold now will double in value in 20 years. If the bonds don’t earn enough interest to double in value, the government will “add money at 20 years to make that happen,” according to TreasuryDirect.
While you can cash an I bond after 12 months, you will lose the last three months of interest if you redeem it before five years. For instance, if you cash a bond you’ve held for 24 months, you will receive interest for only 21 months.
You must pay federal tax each year on any interest earned from TIPS. But these earnings are exempt from state and local taxes.
