How I Bond Rates Work
Series I Savings Bonds pay a composite rate combining a fixed rate (set at purchase, held for the bond's 30-year life) and an inflation rate (adjusted every May and November based on CPI-U). The fixed rate component is critical for long-term value — a 1.3% fixed rate means you earn 1.3% above inflation for the life of the bond. The inflation component tracks the Consumer Price Index and resets semi-annually. At current rates, the composite yield is competitive with many fixed-income alternatives, but the $10,000 annual purchase limit caps how much capital you can deploy.
T-Bill Mechanics and Yields
Treasury Bills are sold at a discount and redeemed at face value. A $1,000 26-week T-Bill purchased for $975 returns $25 in interest at maturity — an annualized yield of approximately 5.1%. Available in 4, 8, 13, 17, 26, and 52-week maturities through TreasuryDirect (no fees) or brokerages. Unlike I Bonds, there is no purchase limit for T-Bills. A T-Bill ladder — staggering purchases across multiple maturities — provides regular liquidity while maintaining yield.
Liquidity and Access Comparison
I Bonds are locked for 12 months with no exceptions. Redemption between 12-60 months forfeits the last 3 months of interest. After 5 years, fully liquid at face value plus all accrued interest. T-Bills can be sold on the secondary market before maturity through any brokerage, though prices fluctuate with interest rates. For emergency reserves, T-Bills offer superior liquidity. For money you're certain you won't need for 12+ months, I Bonds offer inflation-indexed protection that T-Bills cannot match.
Tax Treatment
Both I Bonds and T-Bills are exempt from state and local income taxes — significant in high-tax states like California (13.3% top rate) or New York (10.9%). Federal taxes differ: I Bond interest can be deferred until redemption or final maturity, allowing multi-year tax planning. T-Bill interest is taxable in the year of maturity. I Bonds also qualify for a complete federal tax exclusion when used for qualified education expenses (income limits apply). For investors in high state-tax brackets, the state tax exemption alone adds 0.5-1.3% to effective after-tax yield versus comparable bank CDs or HYSAs.
When Each Makes Sense
Use I Bonds for: money you can lock away 12+ months, inflation protection hedge beyond what nominal rates offer, education savings with tax benefits, and annual deployment of the $10K limit as part of a diversified fixed-income allocation. Use T-Bills for: short-term parking (4-26 weeks), amounts exceeding the I Bond purchase limit, funds that may need to be accessed before 12 months, and T-Bill laddering for regular income. Many investors use both: $10K annually in I Bonds plus T-Bill ladders for additional short-term cash needs.