I Bonds vs High-Yield Savings: Which Should Hold Your Cash?

How I bonds work

Series I savings bonds are sold by the U.S. Treasury through its website, TreasuryDirect. You buy them in electronic form, starting at $25, and they earn interest for up to 30 years.

The rate has two parts. Treasury combines them into one "composite" rate:

• A fixed rate. It is set when you buy the bond and never changes for that bond.
• An inflation rate. It is based on changes in the Consumer Price Index (CPI-U) and resets every six months.

TreasuryDirect publishes the formula it uses to blend the two:

Treasury announces new rates every May 1 and November 1. Your bond's rate then changes every six months from the month you bought it, not on those calendar dates. If inflation turns negative, the composite rate can fall, but TreasuryDirect says it will not go below zero.

How a high-yield savings account works

A high-yield savings account is a regular savings account that pays more than the typical one, often at an online bank.

• The rate is variable. The bank can raise or cut it whenever it wants, and rates often follow the Federal Reserve. Our guide to how the Fed affects savings rates explains why.
• The money is liquid. You can usually move it to checking within a business day or two. The Federal Reserve removed the six-per-month limit on savings withdrawals from Regulation D in 2020, but a bank may still set its own limit, so read the account agreement.
• It is insured. Deposits at an FDIC-insured bank are covered up to $250,000 per depositor, per bank, per ownership category. Credit union deposits get the same standard limit from the NCUA.
• There is no purchase cap. You can deposit as much as you like, though coverage above the insurance limit is a separate question.

I bonds vs HYSA side by side

The catches in the fine print

I bond catches

• The 12-month lock is absolute. TreasuryDirect does not let you cash an I bond in the first year. A job loss or a car repair does not change that.
• The three-month penalty. Between year one and year five, cashing out costs you the last three months of interest.
• Half the rate can disappear. If inflation cools, the inflation part of the rate drops at your next reset. A bond bought with a low fixed rate can end up earning very little.
• Paper bonds through tax refunds are gone. TreasuryDirect stopped selling paper I bonds through federal tax refunds starting January 1, 2025, so electronic purchases are the main route now.

HYSA catches

• Teaser and tiered rates. Some advertised rates are promotional or apply only to part of a balance. Our guide to promotional APYs shows what to look for.
• Rates can drop any time. A variable rate can fall the week after you open the account.
• Conditions. Some accounts tie the top rate to direct deposit or a minimum balance. Read the rate disclosure, not just the banner.

How taxes compare

Compare after-tax numbers, because taxes can change which one comes out ahead.

• HYSA interest is generally taxable as ordinary income for the year it is credited, at the federal level and usually at the state level too. Our guide to taxes on savings interest covers the details.
• I bond interest is subject to federal income tax but exempt from state and local income tax. You can report the interest each year or wait until you cash the bond, it stops earning interest, or you give it away.
• Education use. TreasuryDirect explains that some owners can exclude I bond interest from federal income tax when they use it for qualified higher education costs. Income limits and other rules apply, so check IRS guidance before counting on it.

How to decide: a simple split

You don't have to pick one. You can split money by when you might need it. Work through these questions in order:

1. Is this money my emergency fund or a bill due within a year? If yes, the 12-month lock rules out an I bond for that money; it needs to stay somewhere liquid. Our guide on how much emergency fund you need helps size it.
2. Could I leave the rest alone for at least a year? If yes, an I bond is an option for part of it, up to the $10,000 yearly limit.
3. Would I likely cash it before five years? If so, plan on losing three months of interest and compare that cost honestly.
4. What does each pay today? Check the current composite rate on TreasuryDirect and the current APY on the bank's own rate page, on the same day.
5. What do I keep after tax? Factor in your state income tax, since I bonds skip it.

If you want a fixed rate with a known end date and no annual cap, a CD is a third option to compare. See our CD rates guide, and keep in mind CDs have their own early withdrawal penalties.

How to buy an I bond

1. Open a TreasuryDirect account. Go to TreasuryDirect.gov directly. You will need a Social Security number, a U.S. address, an email address and a checking or savings account for funding.
2. Choose an amount. Electronic I bonds start at $25 and can be bought to the penny above that, up to $10,000 per calendar year in your name.
3. Fund it from your bank. The purchase is debited from the bank account you link.
4. Write down the issue month. Your 12-month lock, your six-month rate resets and your five-year penalty window all count from it.

While the I bond is locked, compare savings accounts for your liquid cash on APY, minimums, rate conditions and transfer speed.