I Bonds are US government savings bonds with an interest rate tied to inflation. HYSAs are FDIC-insured savings accounts at online banks with rates set by the market. Both beat traditional savings accounts — but they have very different rules.
I Bonds: What You Need to Know
- •Rate: Composite of fixed rate + inflation adjustment (CPI-U), updated every May and November
- •Current rate (2025): Check TreasuryDirect.gov — rates fluctuate with inflation
- •$10,000/year purchase limit per person (+ $5,000 via tax refund)
- •1-year lock-up: Cannot redeem within first 12 months
- •Early withdrawal penalty: 3 months of interest if redeemed within 5 years
- •Tax: Federal income tax on interest, but deferred until redemption. State tax exempt.
HYSAs: What You Need to Know
- •Rate: Variable, set by the bank — moves with the federal funds rate
- •Current top rates (2025): 4.0–5.0% APY at online banks
- •No purchase limits — deposit any amount
- •Fully liquid: Withdraw anytime, typically 1–3 business day transfer
- •FDIC insured up to $250,000
- •Tax: Interest taxed as ordinary income each year
When to Choose Each
- •Choose I Bonds if: Inflation is high and expected to stay high, you have cash you won't need for 12+ months, you want guaranteed inflation protection
- •Choose HYSA if: You need full liquidity, you're building an emergency fund, you might need the money within a year
- •Best strategy: HYSA for emergency fund (liquid), I Bonds for longer-term cash savings beyond the emergency fund
I Bond interest is state-tax-exempt. If you're in California, New York, or another high state tax state, that exemption is meaningful — add 2–4% in effective after-state-tax yield depending on your bracket.
Neither is superior for every situation. HYSA wins for liquidity and simplicity. I Bonds win for long-term inflation protection with state tax benefits. For most people: fill your 6-month emergency fund in a HYSA, then consider I Bonds for the next $10,000/year in savings.