TIPS vs I Bonds--What's the Best Way to Hedge Against Inflation?

TIPS (Treasury Inflation Protected Securities) and I Bonds both protect investors against unexpected inflation. Both bonds are also issued by the U.S. Government and are exempt from state and local taxes. But that's about where the similarities end.

There are key differences between TIPS and I Bonds that investors should know. We look at 8 key differences, along with the pros and cons of adding each to your portfolio.

As a bonus, we look at how one of them can help you save for a child's education.

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ABOUT ME

While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I'm the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.

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DISCLAIMER: I am not a financial adviser. These videos are for educational purposes only. Investing of any kind involves risk. Your investment and other financial decisions are solely your responsibility. It is imperative that you conduct your own research and seek professional advice as necessary. I am merely sharing my opinions.

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[Cxba]

Hi Rob! I’m watching this now in May of 2022 and can’t thank you enough for your fantastic explanation between these two options and helping me protect my assets!

[eversunnyguy]

Great demonstration. I will purchase I-bond ...currently pays almost 10% (May 2022). Glad to know that it I-bond won't go negative.

[patblack]

I Bonds can be a good way for an individual or married couple to manage some cash in retirement if they build up the balance in I Bonds over the years (particularly prior to retirement.) Once you have some I Bonds that are held for 5+ years, you're earning inflation-adjusted interest and can draw them down whenever needed at no penalty. Right now you are earning almost 8 times more interest in an I Bond versus a "high yield" savings account. If you make quarterly estimated tax payments, I suppose you could overpay by $1250 each quarter per taxpayer and then convert the tax refund into I Bonds to purchase the additional $5K annually per person. If done each year for 5 years, you would have $75K in I bonds for an individual or $150K per couple, with a portion of those bonds eligible for sale at no penalty. The minimums are modest, so you don't have to buy the entire $10k if that is not in your budget. You have to plan ahead to accomplish this, based on calendar year. Don't wait for the last week of the year to do this, as it can take a few days to get your account set up and the I Bond purchased.

[carefulconsumer]

Thank you for the detailed explanation including the actual charts at T-Direct. I just looked up the recent inflation rate on an I-Bond online and effective Nov 1st, it is 7.12% for the next 6 months. Not bad! Savings rates are basically zero.

[AOqueso]

I know very little about finances, but I've been looking for a way to keep a "savings account/emergency fund" that will hedge against this crazy inflation. The value of the cash under my mattress or the money sitting in my checking account is wasting away. I Bonds seem to be the a great answer for me. Thanks for the video.

[k.]

Thanks for the video! I bonds are unknown to many, but good option at 7.12% right now, with inflation on the rise.

[vemartin]

My entire Emergency Fund is invested in I-Bonds. Since they are tied to a checking account, there is little issue with liquidating them.

[WinstonBoogie]

Thanks, Rob. Great video. I invested very little into I-bonds. It's not really for me. I can see why people buy them, though. There are some benefits. This helped me understand TIPS as I didn't really understand how they worked. I'm a nurse and I picking a lot of overtime so that I can invest as much as possible into my portfolio. Learning about all these strategies is so interesting. Thanks again.

[alleneverhart]

Tax deferment on I Bonds is huge! This makes I Bonds effectively an IRA - you get tax-free compounding. I am committing to buying 10K worth of I Bonds per year and I am looking into overpaying my taxes so I get the extra 5K worth of I Bonds.

[alan]

I agree, the possibility of a negative rate on a TIP makes them a no-go.

[danieldavidson]

Thank you Rob. As always a well thought out and presented bit of information. I think I'm going to purchase I-bonds this year and then consider purchasing each year moving forward.

[snowlion]

Great explanation Rob! Plain and clear as usual. Now I seem to understand the specifics

[simulguy]

These I series Savings Bonds would be a great investment but you're limited to $10K per year.

[HankColter]

Can you comment on the upcoming 10 year TIPS auction? What is the expected rate and how does it compare versus buying an I bond?

[marcw.]

great stuff... bonds are a new thing for me (lots of us now ) Is the iBond rate an APY ? its called "Interest Rate" on the site but it compounds each 6 months...meaning its reinvested I assume, so the APY is Higher than 6.89 % . What say you ?
Regards

[Laborkei]

My comments on Stocks... I buy on the Dip... and typically hold for a very long time. I buy more Stocks with the Dividend's, so I am constantly "Compounding"...

[GHC]

It's wild how much things have changed since the video was posted. Now the ai bond 7.1 going to go higher in May, due inflation hitting 8.5% currently.

[JoeC]

Great info.. thanks.. Subscribed.

Can you do an video on Indexed annuities?.. Are they good?..

[boomerrangerron]

I understand that the new rates for I Bonds are at 7.1%! Great video and tips!

[alleneverhart]

@Rob - can I use my I Bonds to pay for my grandchildren's education without taxation?