Roth IRA conversion (with tax-exempt funds)

[jimbohoward69]

Hey everyone...it's been a while since I posted but I'd like some forum feedback on a scenario I have (along with some questions):

I retired from the Air Force back in May of 2011. My Uniformed Services TSP (401K) balance includes a tax-exempt amount of approximately $6,600 (from deployment contributions). After retirement, I became a full-time student and just finished my B.S. degree a few months ago.

Well, lo and behold, I just got hired as a civilian with the Air Force! So, of course, I will now have a civilian TSP account and will want to merge both of my accounts in short time. However, when the TSP combines both accounts, they cannot transfer over tax-exempt balances.

Once the TSP merges the two accounts, I can request a full withdrawal of the tax-exempt amount. These actions won't be taking place until 2013.

My questions are:

1) If I decide to have the tax-exempt funds direct deposited into a bank account, would I have to include that as income on my tax return? (I would assume NO but figured I would ask).

2) If I decide to have the funds sent to an established Vanguard Roth IRA account, would that count as an annual contribution or would it be treated differently since it's technically a "rollover"?

3) Could I make an additional $5,000 Roth contribution on top of the tax-exempt rollover?

I hope my questions made sense. Any input/advice would be greatly appreciated

[pb4uski]

What you describe sounds similar to after-tax contributions to a 401k.

My understanding is that in some cases the balance can be rolled into a Roth IRA (like pre-tax 401k money can be rolled into a tIRA). Vanguard should be able to tell you if it does in your circumstances.