I Bonds vs T-Bills: After-Tax Guide 2026 | Bright Side Kit

The 60-second verdict

For a one-year hold, T-bills win — for a five-year hold with hot inflation, I Bonds win by a mile. That is the whole story, and the defaults prove it: a 4.26% I Bond composite against 4.10% T-bills, 22% federal bracket, $10,000, one year. The I Bond earns $391.73, forfeits $87.50 to the early-redemption penalty, and keeps $237.30 after tax; rolled T-bills keep $319.80. T-bills win by $82.50. Stretch to five years at a 3.50% renewal and T-bills still win by $223.29 — but at a 5.50% renewal I Bonds win by $633.54. Run your own holding period in the I Bonds vs T-bills calculator — the renewal composite is the input that flips the verdict.

The $319.80 vs $237.30, line by line

The setup: $10,000, a 4.26% I Bond composite (May–Oct 2026 bonds), 3.50% expected renewal, 4.10% T-bills, 22% federal bracket, 1-year hold. State tax (5%) is irrelevant — both sides are exempt by federal law.

Line 1 — the I Bond’s interest. I Bonds compound twice a year: the first half-year at the current composite, later half-years at the renewal. (1 + 4.26/200) × (1 + 3.50/200) − 1 = 3.917275%, or $391.73 on $10,000. The advertised composite is only ever half the story — half your first year runs at 4.26%, the other half at your renewal guess.

Line 2 — the penalty. One year is under five, so the last three months of interest are forfeited: $10,000 × 3.50% ÷ 4 = $87.50. Net interest: $304.23. The penalty eats nearly a quarter of first-year earnings — the reason I Bonds trail their headline rate on short holds.

Line 3 — after tax. Both sides pay federal tax only: $304.23 × 0.78 = $237.30 (a 2.373% effective yield) for the I Bond; $10,000 × 4.10% × 0.78 = $319.80 (3.198%) for the T-bill.

Line 4 — the gap. $319.80 − $237.30 = $82.50 a year on $10,000; 3.198% − 2.373% = 0.825 percentage points. Scale it: $825 on $100,000 — if you could put that much in I Bonds, which the cap below says you cannot.

The composite, anatomized

The 4.26% is two numbers wearing a trench coat. The fixed rate (0.90%) is set at purchase and never changes for the bond’s 30-year life. The inflation rate (3.34% annualized) resets every six months from CPI-U, which rose 324.8 → 330.213 (1.67% over six months) in the May 2026 reading. “What will my I Bond pay next year” has a two-part answer: 0.90% plus whatever inflation does — which is why the calculator asks for a renewal composite instead of pretending 4.26% lasts.

The November 2026 reset was estimated near 4.9% (TIPSWatch, October 2026). The part buyers miss: a bond bought today earns 4.26% for six months, then the new rate for the next six — both rates in sequence. Waiting just swaps which comes first, and the penalty clock starts at purchase, so buying now is rarely wrong.

The lock, the penalty, and the cap

The lock: I Bonds cannot be redeemed in the first 12 months — not for emergencies, not for a better rate. Money you might need within a year does not belong here, whatever the math says. T-bills mature in as little as 4 weeks.

The penalty: redeem before 5 years and you forfeit the last 3 months of interest — $87.50 on $10,000 at a 3.50% renewal, gone for good after 5 years. The 5-year branch shows the effect: no penalty, yet T-bills still win by $223.29 at a tame renewal — the penalty hurts, but the base-rate gap matters more.

The cap: TreasuryDirect limits electronic purchases to $10,000 per person per year (a spouse gets their own). The overflow strategy is a barbell — $10,000 in I Bonds, the rest in T-bills (no cap) — and both halves skip state tax. The gift-box strategy (buy I Bonds as gifts, deliver in future years) can lock today’s fixed rate on more than $10,000.

When each one wins

T-bills win on short holds (the penalty cripples early years), at a tame renewal (3.50% branch: T-bills by $223.29 over five years), inside the 12-month lock, and above the $10,000 cap. They also win rate-lock: a bill’s yield is fixed at auction; the I Bond’s inflation half resets.

I Bonds win when inflation runs hot — the 5.50% branch wins by $633.54 over five years — and they lock a fixed rate up to 30 years. If the Fed cuts while inflation stays warm, T-bill rolls decay and the I Bond’s composite holds — the I Bond’s whole reason to exist. You may also defer federal tax until redemption, which the calculator does not model.

The three mistakes

Mistake 1 — comparing 4.26% to 4.10%. The composite is not a yield you keep: the penalty, the half-year rate split, and the 12-month lock reshape it. After tax at one year, the “4.26%” I Bond keeps an effective 2.373% against the T-bill’s 3.198% — the headline comparison understates the real gap 5×.

Mistake 2 — buying I Bonds with 11-month money. The 12-month lock is absolute and the 3-month penalty makes short holds expensive. The $82.50-a-year T-bill edge is the market price of that lock. Emergency cash never belongs in I Bonds.

Mistake 3 — ignoring the renewal guess. Every I Bond comparison smuggles in a forecast: at 3.50% the I Bond loses by $223.29 over five years; at 5.50% it wins by $633.54 — an $856 swing on one input. No defensible renewal assumption, no verdict.

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