What counts as fixed income
When you buy fixed income, you lend money. The borrower might be a bank, the U.S. Treasury, a state or city, or a company, and in return it promises interest and your principal back on a set date. The word fixed describes the promise, not the value: a bond’s price moves daily, and some instruments in the family, such as TIPS and floating-rate notes, have payments that adjust by formula.
- Bank deposits with a term: certificates of deposit.
- U.S. government debt: Treasury bills, notes and Treasury bonds, TIPS, floating-rate notes and savings bonds such as I bonds.
- State and local debt: municipal bonds, usually free of federal income tax.
- Company debt: investment-grade and high-yield corporate Bonds.
- Pooled products: bond mutual funds and ETFs, and money market funds that hold very short-term debt.
- Insurance contracts such as fixed annuities are often grouped here, though they are not securities you can sell.
What fixed income does in a portfolio
Fixed income is usually the steadier part of an asset allocation. It pays a known stream of interest, tends to swing much less than stocks, and gives you something to spend or sell in a year when stocks are down. That is why the classic balanced mix, the 60/40 portfolio, puts 40% of the money there, and why target-date funds add more of it as the target year approaches.
The trade-off is lower long-run growth and exposure to three main risks. Interest-rate risk: prices fall when rates rise, more for long maturities. Credit risk: the borrower may not pay, which is why lower-rated bonds pay more. Inflation risk: fixed payments buy less as prices rise. With the CPI-U up 3.4% in the 12 months to August 2026, a one-year Treasury yielding 4.44% in mid-September was about 1 percentage point ahead of inflation before tax.
Where you sit on these risks is a choice. Short maturities cut rate risk but reprice sooner when rates drop, and a bond ladder staggers maturities to split the difference. Government debt cuts credit risk. Inflation-protected securities cut inflation risk but usually offer lower starting yields.
How fixed-income payments are taxed
Most fixed-income returns arrive as interest, and interest is taxed as ordinary income at your marginal tax rate, not at the lower rates for long-term gains and qualified dividends. The issuer decides which governments can tax it, so compare choices on what you keep, as the formula and example below do.
Interest on Treasury bills, notes, bonds and TIPS is federally taxable but exempt from all state and local income taxes, and savings bonds get the same treatment. Most municipal bond interest is exempt from federal tax and often from tax in the issuing state, which is why munis are compared on a tax-equivalent yield. CD and corporate bond interest is taxed by both. Money market funds pay dividends rather than interest, but those dividends are generally taxed as ordinary income too.
Two side effects catch people out. Tax-exempt interest still counts in the provisional income that decides how much of your Social Security is taxed. Taxable interest counts as investment income for the 3.8% net investment income tax above its income thresholds. Because interest is taxed every year, many investors keep taxable bonds in tax-deferred accounts and hold stocks in taxable accounts, the idea behind asset location.
Common fixed-income mistakes
Most fixed-income mistakes come from treating every interest-paying product as if it were a bank deposit. Four questions sort them out: who stands behind the payment, whether the value can fall if you need the money early, which governments tax the interest, and how long the money is tied up. A higher quoted yield almost always means more risk on one of those four, so find out which one before you buy.
- Confusing a money market deposit account, which is FDIC-insured, with a money market fund, which is not and can lose value.
- Treating ultra-short bond funds as cash: the SEC notes they tend to carry more risk than money market funds and CDs.
- Reaching for yield with long maturities or low credit ratings without noticing the extra price and default risk.
- Comparing pre-tax yields when one choice is free of state tax or federal tax and the other is not.
- Holding decades of spending in nominal fixed income without a plan for inflation.
Illustrative numbers
Three one-year choices in a 24% federal bracket with a 5% state tax
- y
- Quoted yield before tax
- f
- Your federal marginal tax rate; zero for tax-exempt municipal interest
- s
- Your state income tax rate; zero for Treasury interest and usually for in-state municipal interest
A simplification: it ignores the federal deduction for state taxes, the net investment income tax and AMT on some municipal bonds.
Bank CD at an assumed 4.60%4.60% × (1 − 0.24 − 0.05) = 3.27%
Treasury at 4.44% (par yield, Sept. 18, 2026)4.44% × (1 − 0.24) = 3.37%
In-state municipal bond at an assumed 3.20%3.20% × (1 − 0 − 0) = 3.20%
Inflation: CPI-U, 12 months to August 20263.4%
The Treasury keeps the most after tax even though the CD quotes a higher rate, because its interest skips state tax. All three trail recent inflation, so each one’s real after-tax return is slightly negative. In a state with no income tax the CD would keep 3.50% and come out ahead, so the ranking depends on where you live and your bracket.
At a glance
Common fixed-income choices compared
| Type | Who stands behind it | Can its value fall before maturity? | Interest taxed by |
|---|---|---|---|
| Bank CD | FDIC insurance up to $250,000 per depositor, per bank, per ownership category | No, but early withdrawal can cost a penalty | Federal and state |
| Treasury bills, notes and bonds | Full faith and credit of the U.S. government | Yes, if sold before maturity | Federal only |
| TIPS | U.S. government; principal adjusted to the CPI | Yes, if sold before maturity | Federal only, including inflation adjustments |
| I bonds | U.S. government; cannot be traded | No; locked for 12 months, 3 months of interest lost before 5 years | Federal only |
| Municipal bonds | The state or local issuer | Yes | Usually not federal; often not the issuing state |
| Corporate bonds | The issuing company | Yes, and the issuer can default | Federal and state |
| Bond funds and ETFs | No guarantee | Yes, and there is no maturity date | Depends on the bonds held |
| Money market funds | No FDIC insurance | Yes, it can lose value | Usually federal and state |
Put it in your plan
Fixed Income in MoneyWhatIf
In MoneyWhatIf, the plan’s Inflation & returns settings hold shared assumptions for stock growth, dividends, bonds and cash, and any account can follow them or use its own rates. Cash accounts have their own return assumption. An investment account’s bond share can be split among taxable, Treasury, own-state municipal and national municipal types, which sets how its interest is taxed in a taxable account. Exempt interest still counts in the modeled Social Security provisional-income, IRMAA and marketplace-income calculations, while staying outside the NIIT.
Common questions
Fixed Income FAQs
Is fixed income the same as bonds?
Bonds are the core of fixed income, but the term is broader. It also covers bank CDs, Treasury bills, savings bonds, money market instruments and the funds that hold them, and some people include fixed annuities. What they share is a contract to pay set interest and return principal. That is the dividing line with stocks, which promise nothing and pay dividends only when a company chooses to.
Can fixed-income investments lose money?
Yes. Bonds and bond funds fall in price when interest rates rise, and you lock in the loss if you sell. Issuers can default, especially on high-yield bonds. Inflation can leave you with less buying power even when nothing defaults. The SEC stresses that bond funds can lose money even when they hold only government or insured bonds. CDs held to maturity within FDIC limits, and savings bonds, do not lose principal.
How much of my portfolio should be in fixed income?
There is no single right share. It depends on when you will need the money, how much you will withdraw, other income such as a pension or Social Security, and how well you can live with losses. A 60/40 mix is a common reference point, not a rule. Testing your own plan against bad market sequences gives a better answer than a rule of thumb.
Does fixed income protect against inflation?
Ordinary fixed income does not: a fixed coupon buys less each year, and rising inflation tends to push rates up and bond prices down. Inflation-linked choices are the exception. TIPS adjust their principal to the Consumer Price Index, and I bonds combine a fixed rate with an inflation rate reset every six months. Short maturities also help indirectly, because they reinvest sooner at whatever rates inflation brings.
What is the difference between fixed income and cash?
Cash and cash equivalents are the shortest, most liquid end of fixed income: savings and money market deposit accounts, money market funds and Treasury bills. They barely move in price but tend to earn less over time than longer bonds. Only bank deposits carry FDIC insurance. Longer fixed income usually pays more in exchange for price swings when rates change.