COMPARISON · MONEY · CASH YIELDS
A 4.26% composite I Bond and 4.10% T-bills look like a mismatch — until the fine print. On $10,000 held one year in the 22% federal bracket, the I Bond earns $391.73 in interest, 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. But stretch the hold to five years or let inflation surge, and the verdict flips — run your own holding period below.
Enter the I Bond composite, your expected renewal composite, the T-bill yield, your federal bracket, and how long you will hold. The calculator compounds the I Bond twice a year, subtracts the 3-month early-redemption penalty when you hold under 5 years, taxes both sides at your federal rate (both skip state tax by law), and names the winner with the exact dollar gap.
Rate, lock, and penalty — those are the three moving parts. I Bond interest compounds twice a year: the first 6-month period earns the current composite (4.26% for bonds issued May–Oct 2026), every later period earns your expected renewal composite (3.50% default). Redeem before 5 years and you forfeit the last 3 months of interest — about $87.50 on $10,000 at the default renewal. Both sides skip state tax by federal law (31 U.S.C. §3124); only your federal bracket applies. T-bills compound at the yield you roll them at — with the reinvestment risk that the next auction pays less. At the defaults, I Bonds keep $237.30 after tax and T-bills keep $319.80 — T-bills win by $82.50 (0.825 pp).
Setup: $10,000 in cash, a 4.26% I Bond composite, 3.50% expected renewal composite, 4.10% T-bills, a 22% federal bracket, 5% state tax (irrelevant — both sides are exempt), and a 1-year hold.
The I Bond’s interest. Two half-year periods at semi-annual compounding: (1 + 4.26/200) × (1 + 3.50/200) − 1 = 1.0213 × 1.0175 − 1 = 3.917275%, or $391.73 on $10,000. The first six months run at 4.26%, the second at the 3.50% renewal.
The penalty. A 1-year hold is under 5 years, so the last 3 months of interest are forfeited: $10,000 × 3.50% ÷ 4 = $87.50. Net interest: $391.73 − $87.50 = $304.23.
After tax. Both sides pay only federal tax: $304.23 × (1 − 0.22) = $237.30 — an effective yield of 2.373%. The T-bill side: $10,000 × 4.10% = $410.00 × 0.78 = $319.80 (3.198% effective).
The verdict. $319.80 − $237.30 = $82.50 a year on $10,000; 3.198% − 2.373% = 0.825 percentage points — T-bills win. The penalty eats nearly a quarter of the I Bond’s first-year interest; without it the race would be $305.55 to $319.80 and much closer.
Branch — 5-year hold, 3.50% renewal (no penalty): the I Bond compounds ten half-years: 1.0213 × 1.0175⁹ − 1 = 19.389%, or $1,938.87 interest, no penalty at 5 years — $1,512.32 after tax. T-bills rolled at 4.10%: $10,000 × (1.041⁵ − 1) = $2,225.13 × 0.78 = $1,735.60 — T-bills still win by $223.29 (2.233 pp). Shedding the penalty helps, but it cannot overcome the T-bill’s higher base rate at a tame renewal.
Branch — inflation surge, 5-year hold, 5.50% renewal: the I Bond’s composite chases inflation: 1.0213 × 1.0275⁹ − 1 = 30.374%, or $3,037.36 — $2,369.14 after tax — against the same $1,735.60 T-bill outcome: I Bonds win by $633.54 (6.335 pp). This is the I Bond’s entire reason to exist: when inflation runs hot, the composite follows it and a fixed T-bill yield cannot.
Branch — the cap ($25,000 balance): the calculator refuses — I Bond purchases are capped at $10,000 per person per calendar year on TreasuryDirect. The practical answer is a barbell: $10,000 in I Bonds (the max), the remaining $15,000 in T-bills (no cap) — and both halves keep the state-tax exemption, so the barbell loses nothing to state tax either way.
| Output | Formula | What it means |
|---|---|---|
| I Bond interest | A × ((1 + comp/200) × (1 + renew/200)2Y−1 − 1) | $391.73 at the defaults — semi-annual compounding, first period at the current composite, the rest at your renewal guess. |
| Early-redemption penalty | A × renew/4, only if Y < 5 | $87.50 at the defaults — the last 3 months of interest, forfeited on redemptions before 5 years. Zero at 5+ years. |
| I Bonds after tax | (interest − penalty) × (1 − federal) | $237.30 at the defaults — only the federal bracket applies; state tax is zero by law. |
| T-bills after tax | A × ((1 + tbill)Y − 1) × (1 − federal) | $319.80 at the defaults — rolled at a constant yield; the Accuracy note covers why that is optimistic. |
| I Bond effective rate | I Bonds after tax ÷ A | 2.373% at the defaults — the one number that compares directly against the T-bill’s 3.198%. |
| Winner’s edge | T-bill after-tax − I Bond after-tax, in pp and dollars | 0.825 pp / $82.50 for T-bills at the defaults — the number to decide on. |
The math compounds in whole 6-month rate periods (partial half-years are ignored) and approximates the penalty as 3 months at the renewal rate — the real penalty is the last 3 months of interest actually credited, which can differ slightly. Real I Bonds credit interest monthly at the semi-annual rate, so the true figure lands within a few dollars of this. The T-bill roll assumes a constant yield for the whole holding period — reinvestment risk means reality usually underperforms this when rates fall. The renewal composite is a guess, and it is the single most uncertain input: it follows inflation, which nobody forecasts well. The calculator also taxes the I Bond annually, but you may legally defer the federal tax until redemption (or 30 years) — deferral makes the I Bond slightly better than shown. This is educational math, not tax or investment advice.
Bright Side Kit. "I Bonds vs T-Bills: Which Wins After Tax? (2026 Verdict)." https://brightoolbox.com/i-bonds-vs-t-bills/ Accessed October 23, 2026.Data sourcesTwo parts, announced every May 1 and November 1: a fixed rate that never changes for the life of your bond (0.90% for bonds issued May–Oct 2026) and an annualized inflation rate (3.34% that round, from CPI-U rising 324.8 → 330.213, or 1.67% over six months). Combined: 4.26%. The fixed part is yours forever; the inflation part resets every six months.
Buying now locks 4.26% for your first six months, and then your bond picks up the November rate (estimated near 4.9% in October 2026) for the next six — you get both rates in sequence. Waiting means your first six months start at the new rate instead. Since you cannot know the reset for sure and the penalty clock starts when you buy, buying now is rarely wrong; try both renewals in the calculator above.
TreasuryDirect limits electronic I Bond purchases to $10,000 per person per calendar year (per Social Security number; spouses each get their own $10,000). The gift-box strategy: you can buy additional I Bonds as gifts for someone else and hold them in your TreasuryDirect gift box, delivering them in future years — a legal way to lock today’s fixed rate on more than $10,000. T-bills have no cap, which is why the calculator points overflow there.
Two rules. First 12 months: no redemptions at all — the money is locked. Before 5 years: you forfeit the last 3 months of interest. The calculator approximates this as 3 months at your renewal rate ($87.50 on $10,000 at 3.50%); the real penalty is the last 3 months actually credited. After 5 years: no penalty, ever.
On Form 1099-INT, federally taxable — but you get a choice most savings products do not offer: pay tax on the interest each year as it accrues, or defer it all until you redeem (or the bond stops earning interest at 30 years). Most people defer. Either way, the interest is never subject to state or local tax.
Auto-roll is a brokerage feature (Fidelity, Schwab, Vanguard) that automatically reinvests each maturing T-bill into the next auction — the set-and-forget version of rolling bills. The catch is reinvestment risk: if rates fall, each new bill pays less, and the calculator’s constant-yield assumption overstates your return. I Bonds have the mirror-image risk: their composite follows inflation, not the Fed.
Federal law — 31 U.S.C. §3124 — bars states and localities from taxing interest on obligations of the United States. I Bonds and T-bills are both such obligations, so the exemption applies identically to both. That is why the state-tax field above changes nothing: there is no asymmetry to exploit here, unlike the HYSA comparison.
Falling rates hurt the T-bill roll (each new auction pays less) but barely touch the I Bond: its composite follows inflation, not the Fed, and the 0.90% fixed portion is locked for the bond’s life. That asymmetry is exactly what the 5.50%-renewal branch prices: when inflation runs hot while the Fed cuts, I Bonds win by $633.54 over five years.