High-yield savings accounts are paying 3.5-4.5% in 2026, down from 5.5% two years ago.

If you’re looking for better returns on cash you don’t need immediately, you have two government-backed alternatives:

I Bonds: Currently paying 5.27% with built-in inflation protection
Treasury Bills: Paying 5.0-5.2% with complete liquidity

Both are backed by the US government (zero default risk). But they work completely differently.

Here’s the detailed breakdown of returns, rules, tax treatment, and which one makes sense for your situation.

What Are I Bonds?

I Bonds = Inflation-protected savings bonds issued by the US Treasury.

Key features:

• Interest rate adjusts every 6 months based on inflation (CPI)
• Purchased directly from TreasuryDirect.gov
• Cannot be sold to others (not marketable)
• Must hold for 12 months minimum
• Penalty if redeemed before 5 years (lose last 3 months interest)
• Purchase limit: $10,000/year per person ($20,000 for married couples)

Current rate (January 2026): 5.27% annualized

What Are Treasury Bills?

Treasury Bills (T-Bills) = Short-term government debt maturing in 4 weeks to 52 weeks.

Key features:

• Fixed interest rate set at purchase
• Purchased at TreasuryDirect.gov or through brokerages
• Can be sold before maturity (liquid)
• No minimum holding period
• No purchase limit

Current rates (January 2026):

• 4-week: 4.7%
• 13-week: 4.9%
• 26-week: 5.0%
• 52-week: 5.2%

I Bonds vs T-Bills: Head-to-Head Comparison

How I Bond Interest Rates Work

I Bond rates have two components:

Fixed Rate (Never Changes)

Set at purchase, stays for 30 years.

Current fixed rate: 1.20% (as of November 2024)

Historical context:

• 2000-2007: 1.0-3.6%
• 2008-2019: 0.0-0.5%
• 2020-2022: 0.0%
• 2022-2024: 0.4-1.3%

Why it matters: Even if inflation goes to zero, you still earn the fixed rate.

Inflation Rate (Adjusts Every 6 Months)

Based on CPI-U (Consumer Price Index for All Urban Consumers).

Current inflation rate: 4.07% (annualized)

Combined rate: 1.20% fixed + 4.07% inflation = 5.27%

The rate resets every May 1 and November 1 based on the previous 6 months of CPI data.

What this means:

• If inflation stays at 2%, your I Bond pays ~3.2%
• If inflation spikes to 5%, your I Bond pays ~6.2%
• If deflation happens (-2%), your I Bond pays 0% (never goes negative)

How Treasury Bill Rates Work

T-Bills are sold at a discount and mature at face value.

Example:

You buy a 52-week T-Bill:

• Face value: $10,000
• Purchase price: $9,500
• Maturity value: $10,000
• Interest earned: $500

Yield: $500 ÷ $9,500 = 5.26% (annualized)

The rate is fixed at purchase. If inflation spikes during your holding period, you don’t get extra interest.

Liquidity: The Biggest Difference

I Bonds Are Locked

12-month minimum: You cannot redeem I Bonds for the first year. Period.

5-year penalty: If you redeem before 5 years, you lose the last 3 months of interest.

Example:

You buy $10,000 in I Bonds.
After 2 years, you need the money.
Your balance: $11,054
Penalty: Last 3 months interest (~$131)
You receive: $10,923

After 5 years: No penalty. You can redeem anytime.

T-Bills Are Fully Liquid

You can sell T-Bills anytime in the secondary market (if bought through a brokerage).

Example:

You buy a 52-week T-Bill.
After 6 months, you need the money.
You sell on the open market.
You receive: Face value + accrued interest

There’s no penalty. The market determines the price.

Tax Treatment (Both Are State Tax-Exempt)

Federal taxes:

• I Bonds: Taxed as ordinary income when redeemed
• T-Bills: Taxed as ordinary income when they mature

State/local taxes:

• Both I Bonds and T-Bills are exempt from state and local income taxes

This is huge if you live in a high-tax state.

Example (California resident):

You earn $1,000 in interest.

From a high-yield savings account:

• Federal tax (24% bracket): $240
• CA state tax (9.3%): $93
• Total tax: $333
• After-tax earnings: $667

From I Bonds or T-Bills:

• Federal tax (24% bracket): $240
• CA state tax: $0 (exempt)
• Total tax: $240
• After-tax earnings: $760

You keep an extra $93 just from the state tax exemption.

If you live in CA, NY, NJ, or other high-tax states, this makes I Bonds and T-Bills significantly more attractive than HYSAs.

Purchase Limits and Accessibility

I Bonds Have Strict Limits

Annual purchase limit: $10,000 per person ($20,000 for married couples)

Plus: You can buy an additional $5,000 using your tax refund (must select this option when filing).

Lifetime limit per SSN: No lifetime limit, but $10K/year cap means you can only accumulate slowly.

Example:

Year 1: Buy $10,000
Year 2: Buy $10,000
Year 3: Buy $10,000
After 3 years: $30,000 in I Bonds

T-Bills Have No Limits

You can buy unlimited T-Bills.

Example:

You have $500,000 in cash.
You can put all $500,000 into T-Bills.
You cannot put it all into I Bonds (limited to $10K/year).

This makes T-Bills the only option for large cash positions.

When I Bonds Win

Scenario 1: You Have a 5+ Year Time Horizon

If you don’t need the money for 5+ years, I Bonds are superior.

Why?

• No early redemption penalty after 5 years
• Inflation protection compounds
• State tax exemption
• Locked-in baseline return (1.20% fixed rate forever)

Example:

You buy $10,000 in I Bonds in 2026.
Over 10 years, average inflation: 3%.
Your I Bonds earn: 1.20% fixed + 3% inflation = 4.2% annually.

Compounded over 10 years:
$10,000 grows to $15,099

If inflation spikes to 6% during that time, you automatically get higher returns.

Scenario 2: You Want Inflation Protection

If you’re worried about inflation eating away at your cash:

I Bonds are the only cash-equivalent investment that automatically adjusts for inflation.

Example:

Inflation in 2027: 6%
Your HYSA: Pays 3.5% (you lose 2.5% in purchasing power)
Your I Bond: Pays 7.2% (you gain 1.2% after inflation)

I Bonds protect you from inflation surprises.

Scenario 3: You’re Building a Ladder

The I Bond ladder strategy:

Year 1: Buy $10,000 in I Bonds
Year 2: Buy $10,000 in I Bonds
Year 3: Buy $10,000 in I Bonds
Year 4: Buy $10,000 in I Bonds
Year 5: Buy $10,000 in I Bonds

After 5 years:

• You have $50,000 in I Bonds
• Year 1 bonds are penalty-free (can redeem anytime)
• You have a rolling 5-year ladder

This becomes a high-yield emergency fund that adjusts for inflation.

When Treasury Bills Win

Scenario 1: You Need Liquidity

If you might need the cash within 12 months, T-Bills are the only option.

Example:

You’re saving for a house down payment in 9 months.
You have $80,000 in cash.

T-Bills (52-week at 5.2%):

• You can buy today
• Earn 5.2% for 9 months
• Sell after 9 months with no penalty
• Interest earned: ~$3,120

I Bonds:

• Locked for 12 months minimum
• Cannot use for 9-month goal
• Not an option

T-Bills win when you need flexibility.

Scenario 2: You Have Large Cash Positions

If you have $50K+, I Bonds can’t handle it (limited to $10K/year).

Example:

You have $100,000 in cash (emergency fund + short-term savings).

T-Bills:

• Buy $100,000 in T-Bills today
• Earn 5.2% annualized
• Interest earned: $5,200/year

I Bonds:

• Can only buy $10,000/year
• Takes 10 years to deploy all $100K
• Not practical

For large cash positions, T-Bills are the only government-backed option.

Scenario 3: You Want Simplicity

T-Bills through a brokerage (Fidelity, Schwab, Vanguard) are seamless.

You can:

• Buy with a few clicks
• Set up automatic rollovers
• Sell anytime
• View alongside your other investments

I Bonds require using TreasuryDirect.gov, which is… not great.

TreasuryDirect issues:

• Website looks like it’s from 1998
• Clunky interface
• No mobile app
• Customer service is slow

If you value convenience, T-Bills through a brokerage are way easier.

Advanced Strategy: Use Both

For a $50,000 cash position:

$10,000 → I Bonds (buy every year for 5 years to build a ladder)
$40,000 → T-Bills (split across 13-week, 26-week, 52-week maturities)

Result:

• I Bonds provide long-term inflation protection
• T-Bills provide liquidity and higher immediate returns
• Both are state tax-exempt
• Full government backing

This is the optimal cash management strategy for 2026.

I Bond Laddering Strategy (Step-by-Step)

Goal: Build a $50,000 inflation-protected emergency fund over 5 years.

Year 1 (2026): Buy $10,000 in I Bonds (locked until 2027)
Year 2 (2027): Buy $10,000 in I Bonds (locked until 2028)
Year 3 (2028): Buy $10,000 in I Bonds (locked until 2029)
Year 4 (2029): Buy $10,000 in I Bonds (locked until 2030)
Year 5 (2030): Buy $10,000 in I Bonds (locked until 2031)

In 2031:

• $50,000 total in I Bonds
• Year 1 bonds (bought in 2026) are penalty-free
• Every year after, another $10K becomes penalty-free

You now have a $50K emergency fund that:

• Adjusts for inflation automatically
• Is penalty-free to access
• Earns more than HYSAs
• Is backed by the US government

T-Bill Laddering Strategy (Step-by-Step)

Goal: Deploy $50,000 into T-Bills with rolling maturities.

Month 1: Buy $12,500 in 13-week T-Bills
Month 2: Buy $12,500 in 13-week T-Bills
Month 3: Buy $12,500 in 13-week T-Bills
Month 4: Buy $12,500 in 13-week T-Bills

Result:

• Every month, $12,500 matures
• You can either cash out or roll into new T-Bills
• You always have liquidity within 30-90 days
• You’re earning 4.9-5.0% on the full $50K

This is the T-Bill ladder strategy. It maximizes yield while maintaining quarterly liquidity.

Tax Reporting

I Bonds:

You report interest when you redeem (not annually).

Example:

You buy $10,000 in I Bonds in 2026.
You hold until 2031 and redeem for $13,000.
You report $3,000 interest income on your 2031 tax return.

Option: You can elect to report interest annually if you prefer (most people don’t).

T-Bills:

Interest is reported in the year the T-Bill matures.

Example:

You buy a 52-week T-Bill in January 2026 for $9,500.
It matures in January 2027 for $10,000.
You report $500 interest income on your 2027 tax return.

Both I Bonds and T-Bills are reported on Form 1099-INT.

Inflation Scenarios: Which Performs Better?

Scenario 1: Inflation Stays Low (2-3%)

I Bond: 1.20% fixed + 2.5% inflation = 3.7%
52-week T-Bill: 5.2% (fixed at purchase)

T-Bills win in low/stable inflation environments.

Scenario 2: Inflation Spikes (5-7%)

I Bond: 1.20% fixed + 6% inflation = 7.2%
52-week T-Bill: 5.2% (fixed at purchase)

I Bonds win when inflation accelerates.

Scenario 3: Deflation (-2%)

I Bond: Interest rate floors at 0% (never goes negative)
52-week T-Bill: 5.2% (fixed at purchase)

T-Bills win in deflationary environments.

I Bonds vs T-Bills vs HYSAs

The One-Minute Action Plan

If you have an emergency fund sitting in a HYSA earning 3.5%:

Step 1: Keep 3 months of expenses in HYSA (instant access)
Step 2: Move 6-12 months of expenses to T-Bills (52-week ladder)
Step 3: Buy $10K of I Bonds every January (build long-term ladder)

Result:

• Tier 1: Instant access (HYSA)
• Tier 2: High yield + liquidity (T-Bills)
• Tier 3: Inflation protection (I Bonds)

Average yield: 4.5-5.0% across all tiers (vs 3.5% in just HYSAs)

How to Buy I Bonds (TreasuryDirect.gov)

Step 1: Go to TreasuryDirect.gov
Step 2: Click “Open an Account”
Step 3: Fill out personal information (SSN, bank account)
Step 4: Create account (takes 10 minutes)
Step 5: Log in → BuyDirect → Series I Bonds
Step 6: Enter amount (minimum $25, maximum $10,000/year)
Step 7: Confirm purchase

Your I Bonds appear in your account immediately.

How to Buy T-Bills

Option 1: Through TreasuryDirect.gov

Same process as I Bonds, but select “Bills” instead of “Bonds.”

Option 2: Through a Brokerage (Easier)

Most major brokerages (Fidelity, Schwab, Vanguard) let you buy T-Bills directly.

Fidelity example:

1. Log in to Fidelity
2. Go to “Fixed Income” → “Treasuries”
3. Select 4-week, 13-week, 26-week, or 52-week T-Bill
4. Enter amount (minimum $1,000)
5. Confirm purchase

T-Bills through brokerages are way easier than TreasuryDirect.

The Bottom Line

I Bonds and T-Bills are both superior to HYSAs for cash you don’t need immediately.

Choose I Bonds if:

• You have a 5+ year time horizon
• You want inflation protection
• You’re building a long-term emergency fund
• You max out the $10K/year limit

Choose T-Bills if:

• You need liquidity within 12 months
• You have large cash positions ($50K+)
• You want simplicity (buy through a brokerage)
• You don’t care about inflation protection

Or do both:

• $10K/year into I Bonds (build a ladder)
• Remaining cash into T-Bills (rolling maturities)

Either way, you’re earning 5%+ on government-backed investments while HYSAs pay 3.5%.

Buy I Bonds by January 31 if you want to lock in the current 5.27% rate for the next 6 months.