- Target-Date Funds, I Bonds and TIPS Explained
- I Bond Interest Rate Formula Explained (you are here)
This is part 2 of 2 of our guide to Target-Date Funds, I Bonds and TIPS, and a Plain Word on Crypto. It picks up where Target-Date Funds, I Bonds and TIPS Explained leaves off, and it is written to stand on its own: the key ideas are restated where you need them.
The composite-rate formula looks arbitrary until you see it as two growth factors multiplied for each six-month period: the inflation adjustment (1 + semiannual inflation) and half the fixed rate (1 + fixed ÷ 2). For bonds issued May–October 2026: 1.0045 × 1.0167 = 1.02127515. The composite rate is simply that six-month growth, doubled and expressed as an annual rate: 0.02127515 × 2 = 0.0425503, the 4.26% Treasury publishes. The small cross term (fixed × inflation) exists because the fixed rate is earned on a principal that has already been grown by inflation, exactly as a TIPS coupon is paid on adjusted principal.
Three consequences follow. First, the fixed rate is the bond’s real return for its whole 30-year life; the inflation part only keeps pace. Second, deflation can push the composite rate below the fixed rate, but Treasury sets a floor of zero: the bond’s redemption value never falls. Third, the fixed rate is set by Treasury every May 1 and Nov 1, not by the market, so it can sit well below what TIPS pay: on Oct 1, 2026, the 5-year TIPS real yield was 2.65% against an I bond fixed rate of 0.90%. Fixed rates on I bonds have ranged from 0.00% (for example, every issue from May 2020 through October 2022) to 3.60% (issues of May–October 2000).
TIPS. Treasury Inflation-Protected Securities are marketable Treasury bonds (5, 10 or 30 years) whose principal rises with the CPI and falls with deflation. The fixed coupon is paid every six months on that adjusted principal, and at maturity you receive the adjusted principal or the original amount, whichever is greater. Their yield is a real yield (7.1: Why Investing Differs from Saving): on Oct 1, 2026, the 10-year TIPS yielded 2.88% while the ordinary 10-year Treasury yielded 5.24%. The gap, 5.24% − 2.88% = 2.36%, is the market’s breakeven inflation rate — TIPS come out ahead if inflation averages more than that over the decade.
Tax is the catch. Take $10,000 of TIPS with an illustrative 2% coupon and a year of 3% inflation: principal rises to $10,000 × 1.03 = $10,300, and the coupon pays 2% × $10,300 = $206 instead of $200. Both the $206 and the $300 principal increase are federally taxable that year, even though the $300 is not paid out until maturity — so-called phantom income. Holding TIPS inside an IRA or 401(k) avoids the mismatch; like other Treasuries, they are exempt from state and local income tax.
Three Treasury-backed ways to hold $10,000 for exactly five years, at early October 2026 rates: an I bond with a 0.90% fixed rate; a 5-year TIPS bought at a 2.65% real yield; and an ordinary 5-year Treasury note at 5.01%. All three compound every six months. Illustrative assumptions: inflation runs at a constant annual rate π, the TIPS is bought at par with coupons reinvested at the same yield, and the figures are before tax.
The formulas, with s = (1 + π)½ − 1 as six-month inflation: I bond = $10,000 × [(1 + 0.009 ÷ 2) × (1 + s)]10; TIPS = $10,000 × [(1 + 0.0265 ÷ 2) × (1 + s)]10; note = $10,000 × (1 + 0.0501 ÷ 2)10 = $12,807, whatever inflation does. At π = 3%: I bond = $10,000 × (1.0045 × 1.014889)10 = $12,125; TIPS = $10,000 × (1.01325 × 1.014889)10 = $13,224.
| Average inflation over five years | I bond (0.90% fixed) | 5-year TIPS (2.65% real) | 5-year note (5.01%) |
|---|---|---|---|
| 0% | $10,459 | $11,407 | $12,807 |
| 2.00% | $11,548 | $12,594 | $12,807 |
| 2.34% (break-even) | $11,743 | $12,807 | $12,807 |
| 3.00% | $12,125 | $13,224 | $12,807 |
| 4.50% | $13,034 | $14,215 | $12,807 |
The flip points. The TIPS beats the note once inflation averages more than (1.02505 ÷ 1.01325)2 − 1 = 2.34% a year, the market’s own five-year break-even (published as 2.36% using simple differences). The I bond needs (1.02505 ÷ 1.0045)2 − 1 = 4.13% to beat the note, and at any common inflation rate it trails the TIPS, because its real rate is 1.75 points lower.
What the I bond buys with its lower rate: it can be cashed after 12 months, never loses value, and defers federal tax until redemption. A TIPS sold early can be worth less than you paid, and in a taxable account its inflation adjustments are taxed yearly: at 3% inflation, year one brings $300 of principal growth plus a $272.95 coupon (2.65% × $10,300), about $126 of tax at 22%, mostly on money not yet paid out.
The rules above describe a new purchase by one person. These situations change the answer:
| Situation | What changes | Why | Number or rule |
|---|---|---|---|
| You hold I bonds bought May 2020–October 2022 | Consider cashing each once it is five years old and moving the money to TIPS or a newer I bond | Their fixed rate is 0.00%, so they earn inflation only; deferred interest becomes taxable when you cash them | 3.34% for the current six months vs 4.26% on new bonds; 5-year TIPS real yield 2.65% |
| You want more than $10,000 of I bonds a year | A spouse, each child and an entity can each buy their own $10,000 | The limit is counted per Social Security or Employer Identification Number, and gifts count against the recipient’s limit in the year delivered | An individual and an entity account using the same SSN can each buy up to $10,000 |
| You buy an I bond late in a month | Interest starts on the first day of that month | Treasury credits interest from the first of the month of purchase | Buying on the 28th earns the same month’s interest as buying on the 1st |
| You cash an I bond within five years | You lose the last three months’ interest | A penalty that ends at year five | Cash after 18 months and you receive 15 months of interest |
| You buy a TIPS after years of inflation, or above par | The deflation floor protects less of what you paid | At maturity Treasury guarantees the original principal, not accrued inflation or a premium | With principal adjusted to 1.30 × par, the floor guarantees 1 ÷ 1.30 = 77% of it |
| You hold a TIPS fund instead of individual TIPS | No maturity date and no par floor; price falls when real yields rise | A fund keeps replacing maturing bonds, so its interest-rate sensitivity never runs off | A fund with a 7-year duration loses roughly 7% if real yields rise 1 point |
A plain word on crypto. Cryptocurrencies such as bitcoin are digital tokens recorded on a blockchain. A token has no earnings or interest behind it; its price is whatever the next buyer will pay. Four things follow:
- Volatility is extreme. On Coinbase daily prices, bitcoin fell about 84% from its December 2017 high to its December 2018 low, about 77% from November 2021 to November 2022, and about 53% from its October 2025 high to its June 2026 low.
- Custody and fraud risk are yours. A lost private key or a failed platform can mean total loss, with no deposit insurance. Fraud is common: the FBI’s Internet Crime Complaint Center recorded $11.4 billion of crypto-related losses in 2025, more than half of the $20.9 billion in total reported losses (Part 13).
- It is taxed as property. The IRS treats digital assets as property, not currency: each sale, swap, or purchase paid for in crypto is a taxable disposal, with gains taxed like other capital gains (7.6). Brokers report gross proceeds on the new Form 1099-DA for transactions from Jan 1, 2025, and cost basis for certain transactions from Jan 1, 2026.
- Access is easier, not safer. Since January 2024 the SEC has allowed spot bitcoin exchange-traded products to list on U.S. exchanges; they remove the custody problem, not the price risk or the timing risk. Morningstar estimates that the average dollar invested in the first spot bitcoin ETFs lost about 5.8% a year from January 2024 to June 30, 2026, while the funds themselves returned 8.5% a year: a gap of more than 14 points a year from buying after rises and selling after falls (Mind the Gap 2026).
Every crypto tax rule follows from one classification. Since IRS Notice 2014-21, the IRS has treated virtual currency as property, not currency, so each disposal is a sale of property: trading one token for another, or paying for a $5 coffee with bitcoin bought for $2, realizes a gain ($3 in the coffee case), just as selling a stock would. A holding of more than one year qualifies for the long-term rates in 7.6.
The same classification creates a gap. The wash-sale rule, 26 U.S.C. §1091, disallows a loss when you buy back “substantially identical stock or securities” within 30 days; its text does not mention property such as bitcoin held directly. Proposals in Congress to extend the rule to digital assets have been introduced repeatedly, and none had been enacted as of Oct 2026, so a harvested crypto loss can currently be booked without the 30-day wait (9.5). Treat that as a rule that can change, not a strategy to build on.
Protection is narrower too: SIPC states that it does not protect digital asset securities that are unregistered investment contracts, and FDIC insurance does not cover crypto at all (Part 2.6).
This is why many advisers who include crypto at all cap it at a small share of a portfolio, sized so that a total loss would hurt without changing any plan. The arithmetic: a 5% position that falls 80% costs 5% × 80% = 4% of the whole portfolio; a 30% position with the same fall costs 24%. This volume makes no recommendation either way; the point is that position size, not conviction, limits the damage.
Target-date fund: if one workplace account holds most of your retirement money and you do not want to manage the mix, put 100% of it in the plan’s target-date fund for your retirement year, provided its expense ratio is 0.30% or less; above that, compare the plan’s index funds. Do not add other funds alongside it.
Inflation protection: if the money may be needed in one to five years, or sits in a taxable account, use I bonds up to $10,000 a person a year. If it can stay put until a fixed date and sits in an IRA (or a 401(k) whose brokerage window can buy them), use individual TIPS maturing on that date whenever their real yield exceeds the I bond fixed rate by more than half a point (it is 1.75 points for five years in October 2026).
Crypto: if you hold any, keep it to an amount whose total loss you could absorb without changing a goal; at the 77% fall of 2021–22, a 5% position costs 3.85% of the portfolio.
Assumptions: today’s rates and limits. Ignore the rule when a pension or partner’s portfolio already supplies most of your bond-like income (a target-date fund will then be too conservative), or when you expect to sell TIPS before maturity.
Letting a speculative position grow until it controls the plan. Take a $50,000 portfolio with 30% in crypto against one with 5%, and repeat bitcoin’s 77% fall of November 2021 to November 2022: the large position loses $50,000 × 30% × 77% = $11,550, or 23.1% of the whole portfolio; the small one loses $50,000 × 5% × 77% = $1,925, or 3.85%. The $9,625 difference, had it stayed invested at an assumed 7% for 20 years, would be $9,625 × 1.0720 = $9,625 × 3.8697 = $37,246.
How to avoid it: set the cap in writing before buying, and when gains push the position above it, sell back to the cap as part of your normal rebalancing (7.4). A position that has tripled has tripled its power to hurt you.
Are target-date funds a good investment?
For most workplace savers who want one decision, yes, if the fund is cheap and held alone. It supplies diversification, a glide path and automatic rebalancing, and investors in such funds trade far less. The cautions: the median gap in stock exposure between the most and least aggressive series is about 34 points, and wider at some ages, and for the running household a 0.60% fund instead of a 0.10% one costs about $53,500 over 30 years (see the worked example above).
What is the I bond rate for November 2026?
It has not been announced as of Oct 4, 2026; Treasury publishes new I bond rates on Nov 1. Bonds bought through Oct 31, 2026 earn 4.26% for their first six months and keep a 0.90% fixed rate for life. After that, each bond’s rate resets every six months from its issue month using the inflation rate in force then.
Which is better, I bonds or TIPS?
In October 2026, TIPS pay more: a 2.65% real yield for five years against the I bond’s 0.90% fixed rate. I bonds are better for money you may need before a fixed date, because they never lose value and can be cashed after a year, and for taxable accounts, because their tax is deferred. TIPS suit IRAs and money with a known date.
Can you lose money on TIPS?
Yes, if you sell before maturity: when real yields rise, TIPS prices fall, and TIPS funds have no maturity at which to recover. Held to maturity, an individual TIPS repays at least its original principal, though not necessarily what you paid for it on the secondary market. In a taxable account, tax on inflation adjustments can also exceed the cash it pays you in a year.
How much of my portfolio should be in crypto?
This volume recommends no amount. If you hold crypto, size it by the loss you could absorb: bitcoin fell 84% in 2017–18, 77% in 2021–22 and 53% from October 2025 to June 2026, so a position should be small enough that a fall of that size would not change any goal or date in your plan.
A target-date fund runs a whole glide path and its rebalancing inside one fund, so use it alone and keep it cheap: in the illustration, half a point of extra fee cost the household’s 401(k) $53,499 over 30 years. I bonds (4.26% for bonds issued May–October 2026) and TIPS both protect against inflation, but I bonds are capped at $10,000 a person a year and locked up for 12 months, while TIPS pay a real yield and create taxable phantom income unless held in an IRA or 401(k). The gap between the ordinary 10-year Treasury yield and the 10-year TIPS yield, 2.36% on Oct 1, 2026, is the breakeven inflation rate that TIPS must beat. Crypto has no earnings behind it, has lost more than three-quarters of its value twice, and is taxed as property, so if you hold any, size the position so that a total loss would hurt without changing any plan.
Six questions on this chapter. Decide on your answer first, then click “Reveal Answer.”
1. A hypothetical I bond has a fixed rate of 1.20% and a semiannual inflation rate of 1.50%. Using the Treasury’s composite-rate formula, what annual rate does the bond earn?
- 2.70%
- 3.00%
- 5.40%
- 4.22%
Reveal Answer
Answer: D. Composite = fixed + (2 × semiannual inflation) + (fixed × semiannual inflation) = 0.012 + 0.030 + 0.00018 = 4.22%. Forgetting to double the inflation rate and dropping the small cross term gives 2.70%; doubling the fixed rate as well, again without the cross term, gives 5.40%. (Part 7.8: Target-Date Funds, I Bonds and TIPS, and a Plain Word on Crypto)
2. On Oct 1, 2026, the 10-year Treasury yielded 5.24% and the 10-year TIPS 2.88%. If inflation then averages 3.0% a year over the decade, which comes out ahead, and why?
- Neither, because the two yields already include the same inflation forecast
- The Treasury, because its 5.24% yield is far above the 2.88% TIPS yield
- TIPS, because 3.0% inflation beats the 2.36% breakeven in the yields
- The Treasury, because 3.0% inflation stays below its 5.24% nominal yield
Reveal Answer
Answer: C. The gap between the yields, 5.24% − 2.88% = 2.36%, is the market’s breakeven inflation rate; TIPS win when inflation averages more than that. Comparing inflation with the nominal yield misses that TIPS add inflation on top of 2.88%. (Part 7.8: Target-Date Funds, I Bonds and TIPS, and a Plain Word on Crypto)
3. In 2026 you swap bitcoin you bought for $3,000, now worth $5,000, directly for another crypto token without converting to dollars. How does the IRS treat the swap?
- As a taxable disposal, with the $2,000 gain taxed like any capital gain
- As taxable just when a broker reports the swap on Form 1099-DA
- As a currency exchange, untaxed until the token is converted into dollars
- As a like-kind exchange, deferring the gain until the new token is sold
Reveal Answer
Answer: A. The IRS treats digital assets as property, not currency: each sale, swap or purchase paid for in crypto is a taxable disposal. Broker reporting on Form 1099-DA does not decide whether tax is owed. (Part 7.8: Target-Date Funds, I Bonds and TIPS, and a Plain Word on Crypto)
4. You buy a TIPS on the secondary market whose principal has already been adjusted for inflation to 1.30 times par. If sharp deflation follows, what does Treasury guarantee to pay at maturity?
- Whatever price you paid for it on the secondary market, including any premium
- The adjusted principal of 1.30 times par
- Nothing extra; TIPS principal has no floor at all
- The original par amount, about 77% of today’s adjusted principal
Reveal Answer
Answer: D. At maturity Treasury pays the greater of the adjusted principal or the original principal. The floor protects par, not accrued inflation or a premium: 1 ÷ 1.30 = 77% of the adjusted principal. (Part 7.8: Target-Date Funds, I Bonds and TIPS, and a Plain Word on Crypto)
5. Worked problem: An I bond has a 1.2% fixed rate and a 1.5% inflation adjustment for six months. What is the composite annual rate?
Reveal Answer
Answer: Composite = fixed + 2 × inflation + fixed × inflation = 1.2% + 3.0% + 0.018% = 4.218%.
6. Worked problem: A TIPS bond has $10,000 of principal, 3.2% inflation over the year and a 1.8% real coupon. What is the adjusted principal and the coupon?
Reveal Answer
Answer: Adjusted principal = $10,000 × 1.032 = $10,320. Coupon = 1.8% × $10,320 = $185.76.
- I bond interest rates — I bond composite rate
- Treasury Inflation-Protected Securities (TIPS) — TIPS mechanics
- Publication 550 — Investment income and TIPS taxation
- Digital assets — Crypto taxed as property; Form 1099-DA
- 10-year Treasury yield, series DGS10 — 10-year yield history
- 10-year TIPS yield, series DFII10 — Real yield and breakeven inflation