Let's go one at a time through this.
However, I want to make sure I understand when you can lose principal. With TIPs, you're only able to buy them on the secondary market (if not using Treasury Direct)
No. Most major brokerages offer $0 or low cost primary auctions for US treasury bonds. Fidelity offers $0 treasury purchases online. Noncompetitive bidding is available for up to $10,000,000 in bonds.
which means you might have to pay more than face value,
Yes. That characterizes the secondary market. TIPS funds are subject to the same risks.
and could therefore lose principal if you hold to maturity
Maybe, depending on how you purchased the bond. TIPS maturity values are the maximum of the two: initial face value or inflation adjusted face value. If you hold to maturity and buy at auction, you will not lose your principal. Tax treatment of the principal adjustment due to inflation can complicate the calculations. You may lose any premium you paid over face value to acquire the bond.
or need to sell into the market for less than you purchased for. Do I have that correct?
Yes. If you bought in on the secondary market for above the initial principal value, it is possible for depreciation to reduce the adjusted principal value of the bond. You may also lose any premium you paid over face value to acquire the bond.
With I Bonds, since you can only buy them on Treasury Direct, you don't pay more than face value. At any time after 1 year, you can get your full principal back with no loss, albeit a small loss of some interest if held less than 5 years.
Yes. This penalty decreases your effective yield. I bonds have a 0% floor for the interest rate. This may also reduce your effective yield.
So for example, if someone bought $10,000 worth of I Bonds, they could get their $10,000 back in full after 1 year, just with a 'fee' attached representing some lost interest.
Yes, but it will decrease your effective yield. There may also be tax implications with how the penalty is treated. This is not legal advice (IANAL).
But after 1 year, they wouldn't be at risk of getting less than face value based on market conditions, correct?
Yes, you will receive your principal back, plus any accrued interest.