Treasuries, TIPS, and I-Bonds

There's a particular kind of worry that has nothing to do with chasing big returns. It's the worry of someone who has finally saved a real pile of money — slowly, carefully, dollars that were hard to spare — and now lies awake wondering whether it's actually safe. Not "how do I make it grow fast," but "where do I put this so it can't disappear?" Banks have failed in the headlines. The stock market lurches. And underneath it all sits a quieter fear you may not even have named yet: that money sitting still in a savings account isn't really safe either, because something invisible is eating it.

This is Asel's lesson. You've met her before — Asel Nurlanovna, 36, an accountant in Queens, a green-card holder five years into building a life in the US, sending $400 a month home to family in Kazakhstan and still managing to set aside savings that now total $15,000 in a high-yield savings account. That $15,000 is not play money. It's the safety net under everything, and her instinct about it is conservative and correct: this money must not be gambled. Her question is the honest one — "is there somewhere genuinely safe for this, ideally somewhere it can keep up with rising prices, that I can actually understand and set up myself?" The answer is yes, and it has a name most people never seriously consider: lending to the United States government.

So let's disarm the three fears this lesson carries, right at the top, because each one dissolves on contact with the facts. First, "is anything actually safe?" — yes: debt issued by the US Treasury is the single safest financial instrument in the world, the very thing every other investment's safety is measured against, and this lesson shows you exactly what it is and how to buy it. Second, "inflation quietly ate my cash — is there a government-backed fix?" — yes, and this is the lesson that delivers on a promise an earlier one made: back in the inflation lesson, we saw cash silently lose ground to rising prices and pointed ahead to two government bonds built specifically to stop that leak. TIPS and I-Bonds are those bonds, and here is where we finally open them up. Third, "TreasuryDirect and TIPS sound complicated and intimidating" — they sound that way, but the mechanics are a short, learnable list, and we'll walk the actual purchase screens together so you're recognizing them, not bracing against them.

We'll go in the order the decision actually unfolds. First, the fear itself — what "safe" really means and why even safe cash can lose, picking up exactly where the inflation lesson left off. Then plain Treasuries — bills, notes, and bonds — the risk-free benchmark, how to buy them, and a tax edge that quietly favors people in high-tax places like New York City. Then TIPS, whose principal grows with inflation, and the one tax wrinkle that decides where you should hold them. Then I-Bonds, the savings bond built for exactly Asel's situation, with its rate, its rules, and its limits. And finally, the part that ties it together: which of these tools is right for which job, and which one is right for you.

Before any mechanics, we have to settle the fear that sends people looking for government bonds in the first place, because it has two halves that pull against each other. One half is the fear of loss — the dread that your savings could vanish in a bank failure or a market crash. The other half is subtler and, for careful savers, more dangerous: the fear that money kept "safe" in cash is quietly losing anyway. This section takes both halves head-on, first with Asel's safety question and then with a callback to the saver whose cash we already watched erode.

§1.1 — Asel's $15,000 and the safest place there is

Asel's $15,000 sits in a high-yield savings account — an FDIC-insured account paying far more than a big-bank savings account, a tool from the emergency-fund lesson — and that was a genuinely good first move. FDIC insurance means the federal government guarantees up to $250,000 per depositor, per bank, if the bank fails, so her cash is protected from the one catastrophe most people fear. As far as it goes, her money is safe. But Asel, being an accountant, senses there's a layer underneath the bank-failure question, and she's right: there's a difference between "my bank won't lose it" and "this is the safest thing I can own," and there's a separate question entirely about whether safe cash holds its value over time.

Here is the foundation the whole lesson rests on, and it's worth stating plainly because it reframes what "safe" even means. The safest financial instrument in the world is not a bank account — it's a loan to the United States government. When you buy a Treasury security, you are lending money to the US Treasury, which promises to pay you back with interest. That promise is backed by the "full faith and credit" of the United States — its unlimited power to tax and to issue currency — which is why a US Treasury is treated as having essentially zero risk that you won't be repaid. Banks, corporations, even whole countries are measured against it. When financial people say "the risk-free rate," they mean the yield on a US Treasury. It is the benchmark, the floor, the thing safety itself is defined by.

For Asel specifically, that backing lands with extra weight. As an immigrant building a first-generation foundation in a new country, the idea that the United States government itself stands behind the loan — not a bank that could fail, not a company that could fold — is exactly the kind of bedrock she's looking for. And it turns out a person can lend to the Treasury directly, in $100 increments, through a free government website, with the same money she's keeping safe anyway. The thing she assumed was reserved for institutions and the wealthy is, in fact, the most accessible safe investment in existence. That's the reassurance this lesson is built to deliver: the safest place there is, is open to her.

But "won't lose your money" is only one kind of safe, and Asel's accountant instincts are already circling the other kind. A dollar that is perfectly protected from loss can still buy less next year than it does today. To see why that matters — and why even her well-chosen savings account isn't the end of the story — we have to return to a saver we met before, and to the quiet erosion this lesson was promised to fix.

§1.2 — The leak we promised to fix: nominal vs. real, revisited

Think back to the inflation lesson and to Ruth Kowalski — 67, a retired bookkeeper in rural Ohio, living on a fixed income with $180,000 in savings she'd worked a lifetime to build. That lesson showed something unsettling, and it used a national-average picture to make the point land: with inflation around 4.2%, a typical national-average savings account paying about 0.38% earned a real return — its return after inflation is subtracted back out — of roughly negative 3.8% a year, while even a high-yield account at about 4.0% reached only about negative 0.2%, nearly breaking even but still not gaining ground. Ruth's own cash, spread across a checking account and a money-market account both earning well under 1%, was quietly bleeding purchasing power right alongside that average. The balances on her statements never dropped a dollar, yet what they could actually buy shrank steadily — which is the whole unsettling point: safe-looking money can lose ground without the number ever falling.

That lesson named the two faces of any return and we use them constantly here, so a one-line refresher: a nominal return is the headline number — the dollars, the stated rate — while a real return is what's left after inflation eats its share, the change in what your money can actually buy. A savings account's nominal return can be positive while its real return is negative, which is precisely how safe cash loses ground without the balance ever falling. And at the end of that lesson, we made a specific promise: there exist government bonds — TIPS and I-Bonds — designed so that money you can't afford to risk still keeps pace with rising prices, and "a later lesson covers how those work." This is that lesson. The leak the inflation lesson diagnosed, this lesson hands you the government-backed tools to plug.

So the safety question has two answers, not one, and a complete safe-money plan needs both. For protection from loss, nothing beats a US Treasury — the risk-free benchmark itself. For protection from inflation — the silent erosion that even safe cash suffers — there are two purpose-built instruments, TIPS and I-Bonds, whose value is engineered to rise with prices instead of being eaten by them. The rest of this lesson is the tour: plain Treasuries first (the pure safety tool, with a tax edge that matters to Asel), then TIPS and I-Bonds (the inflation-protection tools, the answer to Ruth's problem), and finally how to decide which one fits which dollar. One honest caveat before we start, to keep this lesson in its lane: these are the safe-and-stable corner of a portfolio. Money with a multi-decade horizon still generally belongs in the diversified stock funds the earlier lessons covered, which have historically outpaced bonds over long stretches. Government debt isn't where you go for growth; it's where you go for the money that must not be gambled — which is exactly the money Asel and Ruth are each trying to protect.

Start with the plain vanilla version of lending to the government: a Treasury security with no inflation feature attached, the kind that simply pays a fixed, stated return. This is the purest form of the "safest thing there is," and understanding it makes TIPS and I-Bonds far easier later, because they're variations on this base. We'll take it in three parts: the three flavors of Treasury sorted by how long you lend (§2.1), how you actually buy one and what "risk-free" does and doesn't mean (§2.2), and a real tax advantage that quietly favors a saver like Asel (§2.3).

§2.1 — Bills, notes, and bonds: the three by maturity

The Treasury issues three kinds of marketable security, and the only thing separating them is the term of the loan — how long until you get your money back. That term has a name worth pinning down: the maturity is the date the loan ends and the Treasury repays you the security's face value (also called par value), the amount printed on the loan — its principal. Everything else about the three is the same machine; only the maturity, and one mechanical detail that follows from it, changes.

Treasury bills — "T-bills" — are the short end: they mature in one year or less (terms run from a few weeks up to 52 weeks). Bills work in a way that surprises people the first time: they pay no periodic interest at all. Instead, you buy a bill at a discount — for less than its face value — and at maturity the Treasury pays you the full face value. The difference is your interest. Buy a 52-week bill with a $1,000 face value for, say, $961, and twelve months later you collect $1,000; that $39 gain is the return. No checks arrive in between; the whole profit is baked into buying low and being repaid in full.

Treasury notes and Treasury bonds are the longer end, and they work the more familiar way. Notes mature in 2 to 10 years; bonds mature in 20 or 30 years. Both pay a coupon — a fixed interest payment, sent every six months, calculated as a set rate on the face value. (The word "coupon" is a holdover from when bonds were paper certificates with detachable coupons you clipped and redeemed.) A 10-year note with a $1,000 face value and a 4% coupon pays $20 every six months — $40 a year — for ten years, and then returns your $1,000 at maturity. The coupon rate is fixed at issue and never changes for the life of that security; what you're promised is exactly that stream of payments plus your principal back at the end.

The practical takeaway is simply to match the maturity to when you'll need the money, because a Treasury held to maturity does exactly what it promised regardless of what markets do in between. For Asel's safety money, a short bill or note is the natural fit: she could put part of her savings in a 52-week T-bill and know, with as much certainty as exists in finance, that she gets a specific amount back in a year. We'll see the live rates in a moment, but hold the shape of it: bills for short, notes for medium, bonds for long, all of them a loan to the safest borrower there is, all of them returning your principal at a known date. (There's also a price-and-yield relationship that governs what an already-issued Treasury sells for if you trade it before maturity — that machinery, and how rising rates push existing bond prices down, was the bond lesson's territory; here we lean on holding to maturity, where that price risk doesn't bite.)

§2.2 — How to buy one, and what "risk-free" really means

There are three doors to a Treasury, and the first is the one that surprises people: you can buy directly from the government, for free. TreasuryDirect.gov is the US Treasury's own website, where an individual can buy new Treasuries with no fees and no middleman. The minimum is just $100, in $100 increments, and the account is open to anyone 18 or older with a valid Social Security number, a US address, and a US bank account — which means Asel, a green-card holder (a lawful US resident, who has a Social Security number), qualifies on all three. There are no fees to open or hold a TreasuryDirect account or to buy at auction. This matters enormously for the lesson's whole thesis: the safest investment in the world is also one of the cheapest to access, sold to you at cost by the borrower itself.

New Treasuries are sold at auction, and the word sounds more intimidating than the reality. The Treasury announces a sale, takes bids, and issues the securities; as a small buyer you place what's called a non-competitive bid, which simply means "I'll accept whatever interest rate the auction sets" — you're guaranteed to get the amount you asked for, and you never have to guess at a rate. (The competitive bidding, where big institutions specify the exact yield they'll accept and can get all, part, or none of their order, is a different world; a TreasuryDirect account only ever places the simple non-competitive kind.) One rule to know: a newly bought Treasury must be held at least 45 days before it can be transferred or sold, and TreasuryDirect itself has no resale market — so if you might need to sell before maturity, the second door is better.

The second door is a brokerage — Fidelity, Schwab, Vanguard, the same kind of account the investing lessons used. Through a broker you can buy Treasuries on the secondary market, meaning already-issued ones being resold by other investors, which lets you pick a specific maturity date and, crucially, sell before maturity if you need the cash. New-issue Treasuries bought through a major broker are typically commission-free; secondary-market trades may carry a small per-bond fee. The third door is a Treasury fund or ETF — a fund holding a basket of Treasuries that trades like a stock — which is the easiest to buy but has one feature to understand: a fund never matures. It continuously rolls maturing bonds into new ones to hold a target maturity, so you never get a guaranteed "return of principal on a date" the way a single bond gives you; its price floats daily and it charges a small expense ratio. That's fine for many uses, but it's a different promise from holding one bond to its maturity, and the difference matters for safety money.

Now the phrase we've been leaning on — "risk-free" — needs an honest asterisk, because taken literally it's misleading and a careful saver deserves the full truth. "Risk-free" means default-free: the near-certainty that the US government will pay you back, which is as close to a sure thing as finance offers. It does not mean free of all risk. A Treasury still carries two real risks. One is interest-rate (price) risk: if interest rates rise after you buy, the market price of your existing bond falls, because new bonds now pay more — so if you sell early, you can take a loss, and the effect is larger for longer maturities. Holding an individual bond to maturity sidesteps this entirely (you get your face value regardless), which is the whole appeal of the hold-to-maturity approach; a bond fund, which never matures, always carries this price risk. The other is inflation risk: a plain Treasury pays back a fixed number of dollars, and if inflation runs hot, those dollars buy less — the exact erosion the inflation lesson described. That second risk is precisely what TIPS and I-Bonds were invented to remove, which is where we're headed next. So: default-free, yes; but not immune to rates or to inflation. A safe foundation, with its limits named.

One forward-pointer to keep the lanes clean: T-bills and Treasury money-market funds are also genuinely useful as a place to park short-term cash — a competitor to high-yield savings and CDs — and that cash-management comparison gets its own full treatment in a later lesson. Here we're owning the deeper question of what government debt is and how it works as a portfolio tool; when it comes time to decide where your everyday emergency cash lives, that's the cash-management lesson's job.

§2.3 — The tax edge: why a New Yorker should care

Here is the part an accountant like Asel will appreciate most, because it's a genuine, often-overlooked edge — and it's worth more to her than to almost anyone, precisely because of where she lives. The interest you earn on Treasuries is exempt from state and local income tax. You still owe federal income tax on it, but your state and your city cannot touch it. This isn't a loophole or a strategy; it's written into federal law, and it applies to T-bills, notes, bonds, TIPS, and I-Bonds alike.

For someone in a no-income-tax state — Florida, Texas, Washington — this exemption is worth nothing extra, because there was no state tax to avoid. But Asel lives in Queens, which means she pays both New York State income tax and New York City income tax on top of federal. At her income, her combined state-and-city marginal rate is roughly 9.3% — that's about 5.4% to New York State (trimmed from 5.5% by a 2026 rate cut) and about 3.9% to New York City. Every dollar of ordinary interest she earns on a CD or a savings account gets taxed at that combined rate by Albany and City Hall before she keeps it; every dollar of Treasury interest does not. For a high-tax-city resident, that's not a rounding error.

The clean way to compare a Treasury against a fully-taxable option like a CD or a savings account is the taxable-equivalent yield: you gross up the Treasury's yield to ask "what would a taxable product have to pay to leave me with the same amount after my state and city take their cut?" The formula is the Treasury yield divided by (1 minus your state-and-local rate). Run Asel's numbers on a recent 1-year T-bill yielding 3.99% (as of June 24, 2026): 3.99% ÷ (1 − 0.093) works out to about 4.40%. So for Asel, a 3.99% Treasury is the after-tax equal of a 4.40% CD. A fully-taxable CD or savings account has to beat 4.40% just to tie the Treasury — and many don't.

In plain dollars on her $15,000: a 1-year T-bill at 3.99% pays her about $599 in interest, and New York State and New York City take none of it. The same $15,000 in a savings account at 4.0% pays about $600, but NY State and NYC take roughly 9.3% of that — about $56 — leaving her around $544. Same money, nearly identical headline rates, and the Treasury quietly keeps about $56 more in her pocket every year purely because of where the tax doesn't reach. That gap scales with the balance and with the tax rate: a higher-earning New Yorker, or a Californian in a top bracket, saves proportionally more. It's the kind of small, durable edge an accountant loves — free money hiding in the tax code, available to anyone who knows to look.

One important piece of fine print, because it's exactly the sort of detail that trips people up and Asel would want to know it: the state-tax exemption flows cleanly through individual Treasuries you own directly, but through a Treasury fund or ETF it's conditional. New York (along with California and Connecticut) only lets you claim the exemption on a fund's Treasury income if the fund held at least 50% of its assets in US government obligations at each quarter-end — and you generally have to subtract the qualifying percentage yourself on your state return, because the brokerage won't pre-exempt it on your tax form. A pure T-bill ETF easily clears that bar; some money-market funds, which hold a lot of repurchase agreements that don't count as government obligations, may not. The practical upshot: to be sure of the state-tax edge, owning the Treasury directly is the cleanest route, and if you use a fund, check that it meets your state's threshold and claim it correctly. (The deeper world of state taxes and the related municipal-bond exemption — another way high-tax-state residents shelter interest — is its own later lesson; here the point is just that the Treasury's state exemption is real, valuable to a New Yorker, and worth a careful claim.)

Plain Treasuries solve the loss problem but not the inflation problem — they pay back fixed dollars that inflation can erode. The first of the two government tools built to fix that is TIPS: Treasury Inflation-Protected Securities. The name says the job. A TIPS is a Treasury whose value is engineered to rise with inflation, so the purchasing power of your money is shielded instead of eaten. This section does it in two parts: the mechanic that makes it work — and a specimen showing it concretely (§3.1) — and the one tax quirk that decides where you should hold a TIPS (§3.2).

§3.1 — How the inflation adjustment works

The specimen above shows the TIPS mechanic in action, and it turns on one elegant idea: instead of changing the interest rate, a TIPS changes the principal. A TIPS has a fixed coupon rate, set at auction and never changed — but its principal is adjusted up and down over time to track inflation, specifically the Consumer Price Index (CPI), the same basket-of-goods measure the inflation lesson used. When prices rise, the Treasury increases your principal by the same percentage; the fixed coupon rate is then paid on that larger, inflation-adjusted principal. So the rate stays put while the dollars it's applied to grow — and your interest payment rises right along with the cost of living.

Walk the specimen's numbers, because seeing it once makes it permanent. Take a TIPS with $10,000 of original principal and a 2.125% fixed coupon (an illustrative rate near today's levels), and suppose prices rise an illustrative 3% a year. At issue, the principal is $10,000 and the year's interest is 2.125% of that — $212.50. After one year of 3% inflation, the principal is adjusted up to $10,300, and the same 2.125% rate now applies to $10,300, paying $218.88. After a second year, principal climbs to $10,609 and interest to $225.44; after a third, $10,927 and $232.20. The coupon rate never moved off 2.125% — but because the principal it's paid on keeps growing with prices, the dollars you receive grow too. That's the whole trick: inflation lifts the base, and the fixed rate rides it upward.

This is why TIPS yields are quoted as a real yield — the return you earn above and beyond inflation. When a 10-year TIPS shows a real yield of 2.23% (as of June 24, 2026), it's promising you 2.23% a year on top of whatever inflation turns out to be, because the inflation part is handled separately by the principal adjustment. Compare that to a plain 10-year Treasury's nominal yield of 4.41% on the same day: the plain Treasury pays more in headline terms, but every bit of its return has to cover inflation first, and whatever inflation eats is gone. The TIPS hands you 2.23% in guaranteed purchasing-power growth, inflation-proofed. (The gap between the two — 4.41% minus 2.23%, about 2.18% — is the market's best guess at average inflation over those ten years, a number called the breakeven inflation rate: roughly, if inflation runs above 2.18%, the TIPS wins; if below, the plain Treasury does. Right now, real yields are historically high — a recent 5-year TIPS auction in June 2026 locked in a real yield near 1.96% — meaning you can currently nail down a solid guaranteed return above inflation, which hasn't always been possible.)

And what about deflation — falling prices? TIPS carry a protection here that's worth knowing precisely, because it's a real reassurance with a real boundary. If prices fall, your principal adjusts down too — but there's a floor at maturity: when the TIPS matures, you receive the greater of its inflation-adjusted principal or its original face value. So cumulative deflation over the life of the bond can never cause you to get back less than the $10,000 you started with at maturity. The boundary to understand: that floor applies only at maturity and only to the original principal. Along the way, the bond's market price can still fall (if you sell early), the principal can dip below its starting point during a deflationary stretch, and — importantly — a TIPS fund, which never matures, doesn't get the floor at all. The guarantee is a hold-to-maturity, own-the-actual-bond guarantee, not a blanket promise that a TIPS can never show a loss.

You buy TIPS the same three ways as any Treasury — directly at TreasuryDirect (in $100 increments, issued in 5-, 10-, and 30-year terms), through a brokerage on the secondary market, or via a TIPS fund or ETF. The fund-versus-individual choice mirrors the one from plain Treasuries but with extra weight: a TIPS fund spreads you across many maturities and handles the messy accounting for you, but it never matures, so you give up that maturity floor and the certainty of a known future payout, and the fund's price can fall. An individual TIPS held to maturity lets you see straight through the interim price swings to a known real outcome. For many beginners a low-cost TIPS fund is the simpler on-ramp; for someone who wants a guaranteed real payout on a date, the individual bond is the cleaner tool. Either way, there's one more thing about TIPS that shapes where you should keep them — a tax quirk — and it's important enough to get its own beat.

§3.2 — The phantom-income tax problem

Here's the wrinkle that catches TIPS owners off guard, and it's the single most important practical thing to know about them. Remember that the principal grows each year with inflation — that $10,000 becoming $10,300, then $10,609. The IRS treats that annual increase in principal as taxable income in the year it happens, at the federal level — even though you don't actually receive that money until you sell the bond or it matures. You owe tax now on dollars you won't hold in your hand for years. This has a memorable nickname: phantom income — income you're taxed on but haven't received.

Make it concrete with the example from the specimen. In the year the principal rose from $10,000 to $10,300, you'd actually pocket the $218.88 coupon — but you'd also owe federal tax on the full $300 of principal growth, even though that $300 stays locked inside the bond. In a high-inflation year, the tax bill on the phantom principal growth can exceed the actual cash coupon you received, meaning the bond can cost you out-of-pocket cash to hold in a regular taxable account. (To keep it in proportion: this is a federal-tax issue only — the interest and the inflation adjustment are still exempt from state and local tax, the Treasury edge from §2.3 holds. And the coupon dollars themselves are real and yours; it's the not-yet-received principal growth that creates the phantom.)

The fix is not to avoid TIPS — it's to hold them in the right kind of account. Inside a tax-advantaged retirement account — a traditional IRA or a 401(k), the accounts from the earlier lessons where investments grow without being taxed each year — the phantom-income problem simply disappears, because nothing is taxed annually in those accounts in the first place. The inflation adjustments pile up untaxed until you withdraw in retirement. This is why the standard guidance is that individual TIPS belong in a tax-advantaged account rather than a taxable brokerage account. (The broader art of deciding which investments to hold in which type of account — taxable versus tax-advantaged — is genuinely its own subject, and there's a whole later lesson on it; the one rule to carry from here is just that TIPS, because of phantom income, are a textbook case for the tax-advantaged side.)

That tax quirk also points directly at why the second inflation-protected tool exists and is often the better fit for ordinary savers. If you want inflation protection for money outside a retirement account — money you're keeping accessible and safe, the way Asel and Ruth both are — TIPS' annual phantom-income tax makes them awkward. The I-Bond was built for exactly that situation: same federal government, same inflation protection, but with the taxes deferred until you cash out, and no phantom income at all. That's where we turn next.

If TIPS are the inflation-protection tool for a retirement account, the I-Bond is the one built for a careful saver's accessible money — for Asel's $15,000 and Ruth's cash alike. A Series I savings bond is a non-marketable US savings bond whose return is tied to inflation, bought directly from the Treasury, designed so an ordinary person's safe money can keep pace with prices without the complications of TIPS. It's arguably the single best fit in this whole lesson for the person who opened it worried about safe cash quietly losing ground. We'll cover its rate (§4.1, with the actual purchase screen), the rules that bind it (§4.2), and its unusually friendly taxes (§4.3).

§4.1 — The composite rate, and the 2022 moment

The screen above is exactly what Asel sees when she goes to buy an I-Bond on TreasuryDirect, and the number that matters most — the rate — is built from two pieces. An I-Bond's return is a composite rate: a fixed rate plus an inflation rate. The fixed rate is set on the day you buy and stays locked for the entire 30-year life of that specific bond — it never changes. The inflation rate resets every six months, on May 1 and November 1, based on the CPI, so it rises and falls with actual inflation. Your bond keeps its original fixed rate forever, while its inflation piece is refreshed twice a year — and the two combine into the composite rate the bond actually earns for each six-month stretch.

Here are the live numbers on Asel's screen, from the rate set May 1, 2026 (good for bonds bought May through October 2026): a composite rate of 4.26%, built from a 0.90% fixed rate and an inflation rate of 1.67% for the half-year (3.34% annualized). The Treasury combines them with a specific formula — composite = fixed + (2 × semiannual inflation) + (fixed × semiannual inflation) — which for these inputs lands at 4.26%. The piece to internalize is what the fixed rate means: because Asel locks in 0.90% above inflation for 30 years, her bond is guaranteed to earn 0.90% a year more than inflation, whatever inflation does, for as long as she holds it. That's a guaranteed positive real return on safe money — the exact thing Ruth's eroding cash never had.

And the inflation piece can be dramatic, which is the relatable hook many people remember. In May 2022, as inflation spiked, the I-Bond composite rate hit a record 9.62% — that was a 0.00% fixed rate plus a roaring inflation component. For a stretch in 2022, I-Bonds briefly became the most talked-about safe investment in America, and TreasuryDirect's website strained under the traffic. That moment is worth remembering for two reasons: it shows how completely an I-Bond tracks inflation (when prices surged, so did the payout), and it teaches the subtler lesson that the fixed rate matters for the long haul — those 2022 buyers got a thrilling headline rate but a 0.00% fixed rate, meaning their bonds earn exactly inflation and never a penny more in real terms. Asel's 0.90% fixed rate, bought in a calmer moment, is in one important way the better deal: it guarantees her purchasing power actually grows, not merely holds.

There's also a floor that makes the I-Bond unusually gentle: the composite rate can never go below 0%. If inflation went negative (deflation) and the math would push the combined rate under zero, the Treasury stops it at 0.00% — your bond simply earns nothing for that stretch rather than losing value. (Note the precise rule, because it's commonly misstated: the floor is 0%, not your fixed rate. In deep deflation a bond with a 0.90% fixed rate doesn't keep earning 0.90% — it floors at zero. Either way, an I-Bond can never lose nominal value, which is part of why it's such a safe place for money you can't afford to risk.)

§4.2 — The rules that bind: limits, lockup, and the penalty

The I-Bond's friendliness comes with a tidy set of rules, and a saver needs all of them up front, because they decide what kind of money belongs in an I-Bond. None is a trap; together they simply define the tool. Take them in order.

First, the purchase limit. You can buy $10,000 of electronic I-Bonds per person, per calendar year, through TreasuryDirect — tracked by Social Security number. That's the cap, and it's the single biggest constraint: I-Bonds can't be a home for a giant lump sum the way a Treasury can. (The minimum, by contrast, is tiny — just $25, in any amount to the penny above that.) One historical note so you're not misled by older articles: there used to be a way to buy an extra $5,000 in paper I-Bonds with your federal tax refund, but the Treasury ended that option as of January 1, 2025 — savings bonds are now electronic-only, via TreasuryDirect. So the practical ceiling for most individuals is $10,000 a year. (A married couple gets $10,000 each; and there are legitimate ways to go further — a revocable living trust or a business with its own tax ID each get their own $10,000 limit, and a parent can open a linked minor account for a child with its own separate limit — but those are advanced moves, and for the typical saver the headline is simply $10,000 per person per year.)

Second, the liquidity rules — when you can get your money out. An I-Bond is completely locked for the first 12 months: you cannot redeem it at all in year one, full stop. After that, it's accessible but with a catch: if you cash it in before five years, you forfeit the most recent three months of interest as an early-withdrawal penalty. After five years, there's no penalty at all — you keep everything. The bond earns interest for up to 30 years total. Put numbers on the penalty so it feels real: on a $10,000 I-Bond earning the current 4.26%, three months of interest is about $107 — so redeeming in, say, year three costs you roughly $107 of the interest you'd earned. That's modest, but it's why the 12-month lockup is the rule that really matters: an I-Bond is not a day-one emergency fund (you literally can't touch it for a year), but it's an excellent home for safe money you won't need for at least one year, and ideally five.

Third, where it lives: I-Bonds are sold only through TreasuryDirect, electronically, and they are non-marketable — meaning you cannot sell, trade, or transfer them to anyone; there's no secondary market. You buy from the Treasury and you redeem back to the Treasury, and that's the entire universe of an I-Bond. That sounds limiting, but it's also what keeps them simple and safe: there's no price to swing, no market to time, no broker to pay. The interest accrues monthly and compounds every six months, quietly, with nothing for you to manage. For Asel, the mechanics are within reach precisely because they're so contained: open the TreasuryDirect account (as a green-card holder she has the Social Security number, US address, and US bank account it requires), link her bank, buy up to $10,000, and leave it alone.

§4.3 — The taxes: deferred, state-free, and a college bonus

The I-Bond's tax treatment is where it pulls decisively ahead of TIPS for ordinary, outside-of-retirement money, and it has three features worth knowing. The first solves the phantom-income problem entirely. I-Bond interest is federally tax-deferred by default: you owe no federal tax on the interest until you cash the bond in (or it hits final maturity at 30 years). There's no annual phantom income, no yearly tax bill on growth you haven't received — unlike a TIPS in a taxable account. The interest compounds untaxed year after year, and you settle up with the IRS only when you redeem. (You may instead elect to report the interest annually if you ever want to, but the default — and what nearly everyone does — is to defer.)

Second, the state-tax edge from §2.3 applies in full: I-Bond interest is exempt from state and local income tax, taxable only at the federal level. For Asel in New York City, that's the same roughly 9.3% her state and city can't touch — stacked on top of the federal deferral. So an I-Bond gives her inflation protection, a guaranteed real return, federal tax she controls the timing of, and zero New York tax. For safe money outside a retirement account, that's a genuinely hard combination to beat.

Third, a bonus for families paying for college: the education tax exclusion. If you redeem I-Bonds (or EE bonds) and use the proceeds for qualified higher-education expenses — tuition and fees — in the same year, the interest can be entirely federal-tax-free, on top of being state-tax-free. It comes with real conditions: the bond must be in an adult's name (not the child's), the owner must have been at least 24 when the bond was issued, and the benefit phases out at higher incomes — for 2026, the exclusion phases out for married-filing-jointly filers between $152,650 and $182,650 of modified income, and for single filers between $101,800 and $116,800. It's not the main reason to buy an I-Bond, but for a parent saving for a child's tuition it can turn an already-good safe investment into a tax-free one. (The fine grain of how this interacts with 529 plans and the exact forms is the tax lessons' territory; the headline is that the option exists and is worth knowing.)

We've now met all four instruments — plain Treasuries (bills, notes, bonds), TIPS, and I-Bonds. The most useful thing isn't any one of them in isolation; it's knowing which dollar goes where. This section puts them side by side, then runs the lesson's central question — the one the inflation lesson set up — through a tool that lets you watch inflation eat a nominal Treasury while TIPS and I-Bonds hold firm. Then we close with the cast: which of these is you.

§5.1 — The four-way comparison and the decision framework

The comparison above lays the tools against each other on the dimensions that actually decide between them — inflation protection, liquidity, contribution limits, taxes, where to buy, and the state-tax treatment. Read down the columns and a clean decision framework falls out, because each tool has a job it's best at.

For ultra-safe short-term cash — money you might need within a year — a T-bill or a Treasury money-market fund is the natural fit: maximum safety, full state-tax exemption, and short maturities so your money is back soon. (This is also where these tools go head-to-head with high-yield savings and CDs, the comparison the cash-management lesson takes up in full; here, just know the T-bill is a strong contender for cash, especially for a high-tax-state resident.) For medium-term inflation-protected savings — money you can leave untouched for at least one year, ideally five-plus — the I-Bond shines: guaranteed real return, taxes deferred, state-tax-free, no phantom income, capped at $10,000 a year. For a longer-term inflation-protected bond allocation inside a retirement account, individual TIPS are the tool, because the tax-advantaged account neutralizes their phantom-income problem and you get a guaranteed real yield to a known maturity. And for the pure risk-free ballast of a portfolio — plus that state-tax edge — plain Treasury notes do the job, paying a fixed return backed by the safest borrower there is.

It helps to hold the real-versus-nominal distinction at the center of all of it, because it's the spine of the whole lesson. A plain (nominal) Treasury pays back a fixed number of dollars; if inflation runs hot, those dollars buy less, and your real return can even go negative — the silent loss the inflation lesson diagnosed. TIPS and I-Bonds are both built to defend purchasing power instead, just by different mechanics: TIPS adjust the principal up with inflation, while I-Bonds adjust the interest rate every six months. Same goal, same CPI index underneath, two different machines. And these government tools are the safe, stable corner of a portfolio — the counterpart to the nominal corporate and total-bond funds the previous lesson covered, and the ballast that sits opposite the stock funds from the earlier lessons. None of them is where you reach for growth; all of them are where you put money that must not be gambled.

§5.2 — Closing the inflation loop, and which one is you

The tool above is the payoff to the inflation lesson's whole warning, made interactive: put in an amount, a holding period, and an inflation scenario, and watch the real — purchasing-power — outcome of three choices side by side: a nominal Treasury, a TIPS, and an I-Bond. Try the default first — $10,000 over 10 years at today's roughly 3.34% inflation. At that inflation rate, all three come out ahead in real terms, with the TIPS leading because real yields are unusually high right now: the nominal 10-year Treasury at 4.41% grows to about $11,085 in today's purchasing power, the TIPS at a 2.23% real yield to about $12,468, and the I-Bond at its 0.90% fixed rate to about $10,937. So far, so reassuring — every option beats the silent erosion of cash.

Now do the thing the inflation lesson was really about: drag the inflation scenario up to 6% and watch what happens. The TIPS and the I-Bond don't move at all — they still land at about $12,468 and $10,937 in real terms, because their whole design is to deliver a guaranteed return above inflation regardless of how high inflation climbs. But the nominal Treasury collapses: that same 4.41% bond now grows to only about $8,597 in real terms — a loss of roughly $1,403 of purchasing power. The fixed dollars it pays back simply can't keep up with 6% inflation, so even though the balance on paper rose, what it can buy fell. That is Ruth's problem from the inflation lesson, shown in miniature, and the solution sitting right beside it: when inflation spikes, the nominal bond quietly loses real ground while TIPS and I-Bonds hold their guaranteed real return. The loop the inflation lesson opened closes here, in a tool you can run on your own numbers.

So, which one is you? Here's the cast, so you can find the situation nearest yours.

Asel — the careful saver with accessible money outside retirement, and the state-tax edge. At 36 in Queens, with $15,000 in safe savings she can't afford to gamble, the I-Bond is close to tailor-made for her: she can put up to $10,000 into one, lock a 0.90% guaranteed real return on top of inflation, defer the federal tax until she redeems, and — as a New York City resident — pay zero state and city tax on the interest. The 12-month lockup is the one thing to respect, so she'd keep enough in her high-yield savings for true emergencies and route the rest she won't need for a year or more into the I-Bond. For the slice she might need sooner, a 1-year T-bill at 3.99% — worth a taxable-equivalent 4.40% to her after the NY tax it dodges — beats most CDs she'd find. Her lesson: the safest investments in the world were open to her all along, and the tax code quietly rewards her for using them in New York.

Ruth — the retiree whose cash the inflation lesson watched erode. At 67 in rural Ohio, living on a fixed income with $180,000 in savings, Ruth was the face of safe-cash-losing-ground: her bank accounts earned far less than inflation, quietly bleeding purchasing power year after year — the silent erosion that lesson clocked at roughly negative 3.8% real for a typical low-rate savings account. TIPS and I-Bonds are the government-backed fix that lesson promised her. An I-Bond (within the $10,000-a-year limit) gives her inflation-tracking safety with deferred, state-free taxes; for a larger inflation-protected allocation she could hold TIPS — and because she's retired and could hold them inside an IRA, the phantom-income problem wouldn't bite. She doesn't have to take stock-market risk to stop the erosion; the government built tools for exactly her fear. Her lesson: "safe" and "keeps up with inflation" are not opposites — these instruments are both at once.

And if you're someone with a long horizon and money you won't need for decades — a younger saver building wealth — the honest answer is that most of that money probably doesn't belong here at all; it belongs in the diversified stock funds the earlier lessons covered, which have historically been the stronger long-run inflation hedge. Government debt is for the safe sleeve: the emergency-adjacent cash, the ballast, the money that must not be gambled. The through-line across all of it: match the tool to the job — a Treasury for pure safety and the state-tax edge, an I-Bond for accessible inflation-protected savings, a TIPS in a retirement account for an inflation-protected bond allocation — buy it directly and nearly for free from the Treasury itself, and let the safest borrower in the world do the one job you hired it for. The fear that opened this lesson — that nothing is truly safe, that inflation will eat you either way — turns out to have a calm, government-backed, fully-learnable answer.

Government bonds attract a specific family of scams, and they're worth naming precisely because several of them work by impersonating the very safety and officialdom that make Treasuries trustworthy. None of what follows is your fault to catch unaided — the schemes are engineered to look official — but a few simple habits defeat almost all of them.

Fake TreasuryDirect sites and phishing

The only official place to buy these securities is TreasuryDirect.gov — note the .gov, reached by typing the address yourself, never by clicking a link in an email, text, or ad. Scammers stand up lookalike domains (a convincing ".com" version, say) to harvest your login, and they send emails posing as the Treasury asking you to "verify your account" or "confirm a transaction." The Treasury does not send unsolicited messages asking you to click a link, log in, or send money, and there are no Treasury-approved apps or third-party sites for account access. If you get one, don't click — go to TreasuryDirect.gov directly, and forward suspected Treasury or IRS phishing emails to phishing@irs.gov with "Treasury" in the subject line.

"Government bonds" that aren't, and bonds that don't exist

A whole genre of fraud sells fictional or worthless paper dressed as Treasury-backed wealth: offers to "rent" or "lease" Treasury securities (no such legitimate arrangement has ever existed — the Treasury only sells at public auction); long-dead railroad or "historical" bonds with real collectible value of a few hundred dollars sold to victims for tens of thousands on bogus "it's secretly worth millions" claims; and the "redemption" or "strawman" myth that your birth certificate or Social Security number is tied to a secret Treasury account you can tap to erase debts. The Treasury is blunt about these: there is no monetary value to a birth certificate or SSN, those "accounts" are fictitious, and a TreasuryDirect account can only ever be funded from your own bank account. If someone teaches you to "create" bonds or unlock a hidden government account, you're being recruited into a scam — sometimes a federal crime.

The advance-fee and "recovery" twist

Never pay an upfront fee, tax, or "bond" to release a promised payout — that's the signature of advance-fee fraud. And if you've been scammed once, expect a second wave: criminals impersonating the IRS or Treasury will call claiming you owe taxes on "recovered" or "frozen" funds, preying on the first loss. Treasury's own watchdog has warned that even its hotline number has been spoofed — so if a caller claims to be the Treasury demanding money or threatening arrest, hang up.

Before you trust any person or firm selling you a bond — verify, free. Confirm a securities salesperson in FINRA's BrokerCheck (brokercheck.finra.org) and the SEC's tools at Investor.gov, which show licensing and any disciplinary history, and demand proof they actually own any security they're offering. To report a scam: the FTC at ReportFraud.ftc.gov (it feeds a database used by thousands of law-enforcement agencies — you can report even if you lost nothing), the SEC at Investor.gov, the FBI's IC3.gov for anything online, and, for a compromised TreasuryDirect account, Treasury Retail Securities Services at 1-844-284-2676. The line the regulators themselves lead with: if something feels wrong, don't let embarrassment keep you quiet — reporting protects the next person as much as you. The no-fault version of that, for anyone this has already hit, is next.

If this lesson landed with a small pang — because you realize your safe money has been sitting in a near-zero account losing ground for years, or you bought an I-Bond and got tripped by a rule, or you paid someone a fee for something the Treasury sells for free — this part is for you, and it carries no lecture.

Start with the most common one: safe cash that's been quietly eroding. If you're only now learning that a savings account earning far less than inflation has been bleeding purchasing power, that is not a failure of intelligence — it's the single most widespread, invisible money leak there is, precisely because the balance never drops and nothing alerts you. Plenty of careful, financially responsible people, including the retiree this curriculum follows, have been in exactly that spot. The interest you didn't earn is in the past and can't be recovered; what you control is every dollar from here. Moving long-horizon safe money into a high-yield account, a T-bill, or an inflation-protected bond is a five-minute change that stops the leak going forward, and that's where essentially all the leverage is.

If you got caught by an I-Bond rule — you tried to redeem in the first year and couldn't, or you cashed out before five years and lost three months of interest — know that these aren't penalties for doing something wrong; they're just the bond's terms, and the cost is small (about three months of interest, often around $100 on a $10,000 bond). The fix is forward-looking: hold the rest of your I-Bonds past the five-year mark and the penalty vanishes entirely, and keep your true day-one emergency money somewhere fully liquid so an I-Bond never has to be tapped early again.

And if you paid a commission, a markup, or an ongoing advisory fee to buy Treasuries or savings bonds that you could have bought yourself at TreasuryDirect for nothing — set down the self-blame. The system rarely advertises that the government will sell you the exact same security for free; someone profited from the gap in that knowledge, which you now have. Going forward, you can buy directly at no cost, or, if you prefer a fund, choose a low-cost Treasury index fund rather than paying 1% a year on assets that need almost no management. If you were genuinely misled or sold a fictitious "bond," report it — to the SEC at Investor.gov, FINRA, or the FTC — even if you're unsure and even if the dollar loss is small; your report helps regulators spot a pattern and protects the next person. You don't have to fix this in secret or alone. The leak stops the moment you redirect the next dollar.

The move

An advisor reviews your portfolio and offers something that sounds prudent and caring: "Let me manage the safe, conservative part of your money — the bonds and cash — so it's professionally handled." Out comes a managed bond allocation, or a recommendation into a set of bond funds, all under their ongoing fee. For a nervous saver, handing the scary part to a pro feels like exactly the right move. Often, it's a fee attached to the one job that needs a professional least.

What's actually being charged

Treasuries, TIPS, and I-Bonds are about the lowest-maintenance assets in existence: a Treasury held to maturity does precisely what it promised with zero management, and you can buy all of them yourself at TreasuryDirect for $0 in fees. So when an advisor places your safe money into a managed account billed at, say, 1% of assets a year, or into bond funds carrying their own elevated expense ratios, or sells you individual bonds with a markup baked quietly into the price, you're paying active-management prices for something that needs almost no active management. On a $300,000 safe-money sleeve, a 1% annual fee is $3,000 every year — for assets that would have sat there safely on their own.

Legit vs. not — the honest line

This isn't always a rip-off, and saying so is what makes the warning land. A fee-only fiduciary who builds a sensible bond ladder, handles the tax-location decisions (which bond in which account — a genuinely fiddly call), and rebalances it as part of a fair, transparent overall fee can be worth it for someone who truly won't do it themselves. The problem is the specific move of charging an ongoing percentage fee on a block of Treasuries and bond funds that a person could hold directly, for free, with a few minutes of setup — and not mentioning that the free version exists. The tell isn't whether they're reassuring; it's what's inside the allocation and what it costs.

The DIY substitute

The reassuring part: this is the most replicable thing in the curriculum. You can open a free TreasuryDirect account and buy Treasuries and I-Bonds yourself at no cost, or, if you'd rather hold a fund, buy a low-cost Treasury or TIPS index fund/ETF (expense ratios as low as roughly 0.03%–0.15%) inside a brokerage account you control. Either route captures essentially the entire return the managed version would, minus the 1% that was quietly leaving every year. For most people, the safe sleeve is the easiest part of a portfolio to run themselves.

The questions that expose it

"What is the total annual cost — your fee plus the funds' expense ratios — as a percentage and in actual dollars on this safe-money balance?" (Vagueness is the tell; a clear number lets you compare it against the $0 of buying directly.)

"Are you buying these as individual Treasuries I could buy free at TreasuryDirect, or funds — and is there any markup on the bond prices?" (This separates genuine service from a fee on free assets.)

"Are you a fiduciary, in writing, and what specifically are you doing for this fee that I couldn't do myself?" (For safe Treasuries, the honest answer is often "not much" — which is your answer.)

The decode in one line: "let me handle your safe money" can mean genuine, fairly-priced help with tax placement and laddering — or it can mean a 1% annual fee on the one part of your portfolio that runs itself, buyable free from the government. The cost-in-dollars question separates the two faster than any amount of reassurance.

If this lesson left a hum of worry — that the safe world is as full of jargon and traps as everything else, that TreasuryDirect sounds like a bureaucratic maze, or that you've already been losing to inflation for years and it's too late — it's worth setting that weight down, because the real picture is far kinder and far simpler than the worry suggests.

Start with the biggest reassurance: the safest investment in the world is genuinely available to you, directly, for free. You don't need wealth, an advisor, or special access to lend money to the United States government — you need a $100 minimum, a TreasuryDirect account, and a few minutes. The thing that sounded exclusive and complicated is, in fact, the most accessible safe investment there is, sold to you at no cost by the borrower itself. For Asel, a green-card holder five years into building a life here, that's not a small thing — the bedrock she was looking for was open to her the whole time.

And the decision that matters most is short. If you do one thing — move safe money that's losing to inflation into something that at least keeps pace — you've done the part that counts. For accessible savings, that's often an I-Bond: a guaranteed return above inflation, federal tax you control the timing of, no state or city tax, backed by the US government, bought in a few minutes and then left alone. You do not have to master breakeven inflation rates or build a bond ladder to get the core benefit. Match the tool to the job — a Treasury for pure safety, an I-Bond for accessible inflation protection, a TIPS in a retirement account — and you've captured almost all of the value.

If you're worried it's too late because your cash has already been eroding, it isn't. The purchasing power you lost is gone, but every future dollar is still yours to protect, and the fix is a five-minute redirect with no penalty and no risk. There's no single high-stakes decision here you have to get perfectly right — only a slow leak you can stop whenever you decide to, and a set of plain, government-backed tools, fully within reach, waiting to do exactly the job you need. Safe and keeping-up-with-inflation are not opposites. You can have both, starting now.

Is my money actually safe if I buy a Treasury? Could the US government default?

A US Treasury is considered the safest financial instrument in the world — it's the very benchmark every other investment's safety is measured against. The repayment is backed by the "full faith and credit" of the United States, meaning its unlimited power to tax and to issue currency, so the risk that you won't be paid back is treated as essentially zero. That's what people mean by the "risk-free rate." Two honest caveats, though, because "risk-free" is shorthand, not literal. First, "risk-free" means default-free — it does not mean the price can't move. If you sell a Treasury before maturity after interest rates have risen, you can take a loss, because newer bonds now pay more (this is interest-rate risk, and it's bigger for longer maturities); holding an individual bond to maturity sidesteps it entirely, since you get your face value back regardless. Second, a plain Treasury pays back a fixed number of dollars, so high inflation can erode what those dollars buy — that's inflation risk, and it's exactly what TIPS and I-Bonds are built to remove. So: as safe from default as anything on earth, but match the maturity to when you need the money, and use TIPS or I-Bonds if inflation is your worry.

What's the actual difference between TIPS and I-Bonds — they both sound like inflation protection?

They are both government inflation-protection tools tied to the same CPI inflation measure, but they're built for different jobs and they work by different mechanics. A TIPS adjusts its principal up with inflation (and a fixed coupon rate is paid on that growing principal), it's a marketable security you can buy and sell, it comes in 5/10/30-year terms, and — the catch — its annual inflation adjustment is federally taxable each year even though you don't receive the cash until you sell or it matures ("phantom income"). That tax quirk makes individual TIPS best held inside a tax-advantaged retirement account. An I-Bond instead adjusts its interest rate every six months (a composite of a fixed rate locked for life plus an inflation rate), it's non-marketable (you buy from and redeem to the Treasury only), it's capped at $10,000 per person per year, and its federal tax is deferred until you cash out — no phantom income — plus it's state-and-local-tax-free and even federally tax-free if used for qualified college expenses. The rule of thumb: I-Bonds for accessible inflation-protected savings outside a retirement account (Asel's and Ruth's situation), individual TIPS for an inflation-protected bond allocation inside a retirement account. Both beat letting safe cash erode.

How much can I put into an I-Bond, and how soon can I get my money back?

The limit is $10,000 of electronic I-Bonds per person per calendar year, bought through TreasuryDirect and tracked by your Social Security number (the minimum is just $25). That cap is the I-Bond's biggest constraint — it can't absorb a large lump sum the way a Treasury can. (An older option to buy an extra $5,000 in paper bonds with your tax refund was discontinued as of January 1, 2025, so it's electronic-only now; a married couple gets $10,000 each, and trusts or businesses with their own tax IDs have separate limits, but those are advanced.) On access: an I-Bond is locked completely for the first 12 months — you cannot redeem it at all in year one. After that you can cash it any time, but if you redeem before five years you forfeit the most recent three months of interest (on a $10,000 bond at the current 4.26% rate, that's about $107). After five years there's no penalty at all, and the bond earns interest for up to 30 years. The practical takeaway: an I-Bond is not a day-one emergency fund (you literally can't touch it for a year), but it's an excellent home for safe money you won't need for at least one year, and ideally five or more.

Why do Treasuries get recommended for people in high-tax states like New York or California?

Because the interest on all Treasuries — bills, notes, bonds, TIPS, and I-Bonds — is exempt from state and local income tax (you still owe federal tax). For someone in a no-income-tax state like Florida or Texas, that's worth nothing extra. But for someone like Asel in New York City, who pays both New York State tax (~5.4% at her income) and New York City tax (~3.9%) — roughly 9.3% combined — every dollar of Treasury interest escapes that 9.3% that a CD or savings account would lose. The clean comparison is the "taxable-equivalent yield": a Treasury yield divided by (1 minus your state-and-local rate). A 1-year T-bill at 3.99% becomes, for Asel, the after-tax equal of a 4.40% taxable CD — so a CD has to beat 4.40% just to tie it. In dollars on her $15,000, the Treasury quietly keeps about $56 a year more than a same-rate savings account, purely on the tax the city and state can't reach, and that gap grows with the balance and the tax rate. One piece of fine print: through a fund or ETF the exemption is conditional in New York, California, and Connecticut (the fund must hold at least 50% in government obligations at each quarter-end, and you claim it yourself on your state return), so owning the Treasury directly is the cleanest way to be sure of the edge.

What is "phantom income" on TIPS, and how do I avoid it?

Phantom income is the most important practical thing to know about TIPS. Because a TIPS's principal grows with inflation each year, the IRS treats that annual increase as taxable federal income in the year it happens — even though you don't actually receive that money until you sell the bond or it matures. So you can owe tax now on dollars still locked inside the bond. In a high-inflation year, the tax on that phantom principal growth can even exceed the cash coupon you received, meaning a TIPS in a regular taxable account can cost you out-of-pocket to hold. The fix isn't to avoid TIPS — it's to hold them in the right account. Inside a tax-advantaged retirement account (a traditional IRA or 401(k)), nothing is taxed annually, so the phantom-income problem simply disappears and the inflation adjustments compound untaxed until you withdraw. That's why the standard guidance is: individual TIPS belong in a tax-advantaged account, not a taxable brokerage. If you want inflation protection for money outside a retirement account, an I-Bond is usually the better tool, because its tax is deferred until you redeem — no phantom income at all. (Which investments belong in which account type is its own larger topic, covered in a later lesson; the rule to carry here is just that TIPS are a textbook case for the tax-advantaged side.)

Do I really have to use TreasuryDirect, or can I just buy these through my brokerage?

It depends on which one. Plain Treasuries and TIPS you can buy either way — directly at TreasuryDirect (free, new issues at auction, $100 minimum) or through a brokerage like Fidelity, Schwab, or Vanguard, which also lets you buy already-issued ones on the secondary market and sell before maturity. New-issue Treasuries at a major broker are usually commission-free, so for most people a brokerage is the more convenient door for Treasuries and TIPS, especially if you want everything in one place. I-Bonds are the exception: they're sold only through TreasuryDirect, electronically, and can't be bought through a brokerage at all (they're non-marketable — no broker, no secondary market). So if you want I-Bonds, a TreasuryDirect account is required. The good news is it's free to open and use, the minimums are tiny ($25 for an I-Bond, $100 for a Treasury), and a green-card holder like Asel can open one with her Social Security number, a US address, and a US bank account. If you'd rather not manage individual bonds at all, a low-cost Treasury or TIPS index fund inside your existing brokerage is a perfectly good alternative for the Treasury and TIPS side — just remember a fund never matures, so it doesn't give you the hold-to-maturity guarantees an individual bond does.

If TIPS and I-Bonds protect against inflation, why would anyone buy a plain Treasury?

Because inflation protection isn't free, and a plain Treasury wins in some conditions. The difference between a nominal Treasury's yield and a TIPS's real yield of the same term is the "breakeven" — the market's expected inflation. Recently the 10-year nominal Treasury yielded about 4.41% and the 10-year TIPS about 2.23% real, a breakeven near 2.18%. If actual inflation comes in below that breakeven, the plain Treasury actually delivers more; the TIPS only wins if inflation runs above it. So a plain Treasury is the better bet when you think inflation will stay tame, and it's the simpler tool for pure safety, for short-term cash (a T-bill), and for capturing the state-tax edge without any phantom-income complications. There's also the practical limit that I-Bonds are capped at $10,000 a year, so larger safe allocations need plain Treasuries (or TIPS) regardless. Think of it as: plain Treasuries for pure, simple safety and ballast; TIPS and I-Bonds for when protecting purchasing power against the risk of high inflation is worth giving up a little expected return. Many sensible safe-money plans hold some of each.

This is the one interactive piece, and it's the direct payoff to the inflation lesson — an inflation-protection modeler that runs the lesson's central question on your own numbers. Enter an amount, a holding period, and an inflation scenario, and it shows the REAL (purchasing-power) outcome of three choices side by side: a nominal Treasury, a TIPS, and an I-Bond. It's pre-filled with the lesson's canonical case — $10,000 over 10 years at today's roughly 3.34% inflation, using the live rates (a 4.41% nominal 10-year Treasury, a 2.23% TIPS real yield, and a 0.90% I-Bond fixed rate) — which reproduces about $11,085 real for the nominal Treasury, $12,468 for the TIPS, and $10,937 for the I-Bond. Then do the thing the whole lesson builds to: drag the inflation slider up to 6% and watch the TIPS and I-Bond lines hold perfectly still (about $12,468 and $10,937 in real terms, because their design guarantees a return above inflation no matter how high it climbs) while the nominal Treasury collapses to about $8,597 real — a loss of roughly $1,403 of purchasing power. That's the silent erosion the inflation lesson diagnosed, and the government-backed cure, in one view. Clear it and put in your own situation — your real safe-money amount, your own horizon, and the inflation rate you fear — to see which tool protects you. Every figure recalculates live from your inputs using the same real-versus-nominal math worked through this lesson; the rates shown are live as of June 2026 and the inflation scenario is yours to set, never a promise; and nothing you type is stored — close the tab and it's gone.