Lately, I’ve been thinking a lot about where to park cash safely while still earning a decent return. With high-yield savings accounts offering around 4% and I-Bonds paying 3.98%, the two seem almost identical on the surface. But when I took a closer look, I realized what many of us overlook — the difference between I-Bonds and savings accounts isn’t just the rate. More important is how our money compounds and how much of it we actually get to keep after taxes.
I’ve owned I-Bonds for years, and even though the rate sometimes looks lower, I’ve learned to appreciate how quietly they compound free from state taxes and deferred from federal taxes until redemption. With the next I-Bond rate calibration coming on November 1, 2025, I’m expecting the inflation-adjusted side of the rate to rise, since it’s based on the Consumer Price Index (CPI). The fixed portion, though, is what really makes certain I-Bonds stand out, and that’s what a lot of people tend to overlook.
One key difference that’s often overlooked is how interest compounds. High-yield savings accounts usually compound monthly, while I-Bonds accrue interest monthly but only compound semiannually — every six months. That means you won’t see your I-Bond balance update as often, but the effect over time is nearly the same, especially when you factor in the tax advantages.
Why the Fixed Portion Matters
The I-Bond rate is made up of two parts: a fixed rate, which never changes for the life of the bond, and an inflation rate, which adjusts every six months (May 1 and November 1).
Older I-Bonds with a 0% fixed rate are currently only yielding 2.86%, much lower than the newer/current issues. That fixed component adds a crucial layer of guaranteed return, especially if inflation cools down in the future.
In other words, locking in I-Bonds now (or soon, if the fixed rate holds) could be an ideal move. The fixed side provides a permanent foundation of return, while the inflation side adjusts to protect our purchasing power. It’s the best of both worlds — a safe, tax-advantaged investment that quietly builds over time.
5-Year Growth: I-Bonds vs. 4% Savings Account
| Year | I-Bonds (3.98%, compounding, tax-deferred) | Savings (4%, Federal tax at 12%) |
|---|---|---|
| 1 | $10,398 | $10,352 |
| 2 | $10,812 | $10,715 |
| 3 | $11,243 | $11,090 |
| 4 | $11,692 | $11,477 |
| 5 | $12,159 | $11,876 |
After 5 years:
I-Bonds: ~$12,159 (no taxes paid yet)
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Savings: ~$11,876 (after annual federal taxes)
Even though the savings account offered a slightly higher rate, I-Bonds come out ahead because they compound pre-tax. But since I live in New Jersey, I wanted to see how that advantage changes when including state taxes — which don’t apply to I-Bonds.
Updated 5-Year Comparison: Including NJ State Tax (6.37%)
| Year | I-Bonds (3.98%, tax-deferred) | Savings (4%, taxed at 18.37% (NJ and Federal) |
|---|---|---|
| 1 | $10,398 | $10,327 |
| 2 | $10,812 | $10,661 |
| 3 | $11,243 | $11,006 |
| 4 | $11,692 | $11,362 |
| 5 | $12,159 | $11,729 |
After 5 years:
I-Bonds: ~$12,159
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Savings: ~$11,729
That’s roughly a $430 difference, and that gap could grow wider if inflation rises or if we redeem our I-Bonds during a low-income year — reducing or even eliminating our federal tax bill.
Key Takeaways
I still keep a high-yield savings account for short-term needs, but for anything I don’t need right away, I’d rather have my money in I-Bonds. They give me peace of mind with inflation protection, steady compounding, and a tax edge that really adds up over time.
The fixed portion of I-Bonds is what makes them truly special. Older I-Bonds with no fixed rate are earning just 2.86%, while newer ones with a small-fixed component perform much better. If the Treasury keeps the fixed rate steady, this is a promising time to buy, locking in that guaranteed return before it potentially changes. I suspect the fixed rate may drop back to zero eventually, making current bonds even more attractive.
It’s also important to consider the rules around liquidity:
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I-Bonds cannot be redeemed for the first 12 months.
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If you redeem an I-Bond within the first five years, you forfeit the last three months of interest.
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Annual purchase limits are $10,000 per person per year, so they aren’t suitable for allocating large sums quickly.
In short, I-Bonds should be treated as a long-term home for money not a source of immediate cash. If we’re comfortable committing to that horizon, the combination of tax-deferred growth, state tax exemption, and inflation protection makes I-Bonds a compelling component of a cash strategy. For funds we may need sooner, keeping some money in a high-yield savings account is sensible. The key is balancing the two buckets according to need and timeline.
Looking back, the I-Bonds issued during the peak inflation period of 2021 to 2022 delivered some remarkable gains. While the fixed rate on those bonds was modest, the inflation-adjusted portion skyrocketed, briefly pushing composite rates over 11%. For anyone holding bonds during that window, the impact was significant. Even a relatively small principal could grow quickly in just a few months, far outpacing what a high-yield savings account could offer at the time. That short-lived spike illustrates the power of the inflation component in I-Bonds, showing how they can provide a temporary windfall during periods of high inflation while still offering long-term stability through the fixed portion. It also outlined the importance of diversification. It would have been great to have it all in that, "Honey Pot," then but it was short lived. With diversification, we can capture the favorable gains as they change from one source to an another.
For me, I-Bonds are the quiet cornerstone of a sound savings plan. They don’t get much attention, but they keep working - safely, steadily, and efficiently - in the background of our financial lives.
Disclaimer: I’m not a financial advisor. This post reflects my personal views and experiences. Always consider your personal situation and consult a professional before making investment decisions.
