I Savings Bonds
I Savings Bonds provide a very safe home for your money - the US Treasury backs the bonds with its full faith and credit. Paper bonds are registered, so can be replaced if lost or stolen. Electronically held bonds are safely maintained in your US Treasury account. The bonds earns reasonable interest, whilst offering complete protection from inflation.
The interest rate given on I bonds is a composite rate based on a combination of a fixed and variable rate. The intial fixed rate applies throughout the bond's life. The variable rate is taken from the Consumer Price Index, and changes twice-yearly. In the event of deflation, it is guaranteed that the composite rate will not fall below zero. Interest is compounded twice a year for 30 years.
I Bonds are bought at their face value. It's easiest to buy them straight from the Treasury Direct website (see link). You have to hold the Bonds for a minimum of 12 months. After 12 months, you can redeem them at any time, although there is a 3 month interest penalty if redeemed during the first 5 years. After 5 years there is no interest penalty.
I Bonds offer tax benefits - interest is exempt from both state and local income taxes. Federal income tax is deferred until your bonds mature, or until you redeem them, whichever happens first. This can be be very useful if you are considering retiring on a lower income before redeeming the bonds - this will greatly reduce your tax liability on the interest.
No federal taxes are due on interest from I Bonds used to pay qualified educational expenses.