Anything your Roth IRA invests in is tax-free, as long as it stays in the account. Interest your savings bonds earn can accumulate for years without adding a penny to your tax bill. Unlike a traditional IRA, withdrawals from a Roth are usually tax-free as well, but there are times when that isn't the case.
You can withdraw your savings-bond money tax-free as long as you follow the IRS withdrawal rules. To avoid taxes on earnings, you have to wait at least five years after you opened the account, and you have to be at least 59 1/2 years old, the minimum age for IRA withdrawals. You can also withdraw earnings without paying tax if you're disabled, and your beneficiaries can withdraw them tax-free after your death. This applies to earnings from any investments in your Roth.
If you take money out without regard to the rules, some of the withdrawals may be taxable. Suppose you contribute $10,000 to your Roth and invest it in savings bonds. If you tap the account within two years of opening it, instead of waiting five, you can still withdraw your original deposit tax-free. The money your bonds earned, however, is subject to income tax when you withdraw it. If you're younger than 59 1/2, the IRS also hits you with a 10 percent tax penalty on the earnings.
When you make an early withdrawal, you don't have to tell your Roth manager that you want the original contributions out but not any earnings. IRS rules make it much simpler: All your withdrawals are assumed to come from your original contributions until you exhaust that pot. If you put in $20,000 over several years and earn $4,000 in interest, the first $20,000 you take out is the tax-free deposit. Only after that do you tap the taxable dollars.
Investing your Roth in savings bonds isn't easy. As an individual, you can buy savings bonds electronically from the government with a TreasuryDirect account. That option isn't open for a Roth. You can invest in paper securities, but only if the investment company managing your account has someone willing to serve as trustee. The trustee can then register the bonds you buy in the name of your Roth. This requires more work for the company and probably more fees for you.