Series I bonds earn interest for 30 years and qualify for the educational tax exemption. The bonds must be held for a minimum of six months before redeeming. A three-month interest penalty is imposed on bonds that are redeemed before five years have passed since date of issue. The bonds are tax-deferred for as long as you hold them and are free of state and local taxes. Daniel Pederson, who publishes the Savings Bond Informer, says the Series I bond is virtually risk-free and exempt from state and local taxation.
Investors also can defer the reporting of their interest until they cash the bonds in.
However, there is some downside risk to the bonds. For instance, a negative number on the CPI would be subtracted from the fixed rate of return. I bond would drop to 2.6 percent. Pederson warns investors to get used to seeing more volatility in the rates over any six-month period. You might have a six-month period where inflation is 4.5 percent, sending the bond yield up to 8.1 percent, then it may nosedive to 1 percent for the next six months, giving a yield of 4.6 percent.