Bingo!! You are dead on with this. I had not read up on this thread in a while, and was going to respond to the 10 other previous posts that mentioned only contributing to a Roth while deployed. That makes no sense. The above bolded stuff is probably the most misunderstood concept that guys in this thread have.
To the poster who wrote about turning on and off contributions to the Roth before and after the deployment, you are creating a lot of extra work and creating extra confusion.
Like Jaded said, your 1040 tax return does not give a shit when you earned tax-free CTZE income. Your W-2 does not give a crap when you earned CTZE income. Also, your Roth doesn't give a shit whether or not you earned tax-free income or not, it just cares that money is coming into it. Of course, that money going into a Roth is after taxes, whether or not you deployed, had deductions, etc. Again, the money you earn in a CTZE is not somehow specifically electronically marked as "combat pay" when it goes into your bank account or when it is taken from your LES and put into the TSP. It all goes into a pot of money that is sorted out when you (or TurboTax, Taxslayer, etc) do your taxes by entering the taxable amount from your W-2 into your 1040. That taxable amount does not include any Q-code tax free combat zone income.
Also like Jaded eluded to, it makes the most sense to look at taxes, tax rates, income, and investments over the course of an entire year. You may as well get out of the mindset that you have to contribute to after tax accounts (Roth) while you are actually in a combat zone because that money is tax free and will come out tax free. In actuality, that investment into the Roth is not tax free at all. Even if you physically put it into the Roth from your laptop while you were taking mortar fire while hiding under your bed in Kandahar, that money still most likely got taxed due to your other, taxable income that year (did I mention that you have to look at taxes over the course of a year and not by the month???) Here is another illustration to prove my point:
You deploy for 4 months and end the year with 30K CTZE income and 40K of "regular," stateside taxable pay. Ignoring all deductions, exemptions, tax-free BAH, credits, etc for illustration purposes, you will receive a W-2 in January that says 40K taxable income on line 1 and on line 12 will have Q 30K of tax free income (again - no sign of the timeline as to when you earned the $30K of CTZE income). Your tax software will then crunch the numbers, and you will pay taxes on the 40K and will owe about $6K, or about 15%. Of course, your annual income was indeed $70K, but you still only pay $6K in taxes, for an annual tax rate of about 8.5%. So in this manner, I can easily say that your tax-free income was actually taxed at 8.5%, just as your stateside income was taxed at 8.5%. Why? Because taxes are calculated annually, not monthly. Did I mention that?
So, whether you transferred the $5K from your bank account into the Roth IRA when you were in the CAOC or at home in Cannon, sitting in your PJs sipping coffee, the money you put in to the Roth was taxed at 8.5%. You earned tax-free income that year, but your Roth contribution came out of the same pot that your taxed income did - the $70K pot. So, in the end, guys can imagine in their heads that the money they are putting into a Roth is "tax-free" going in and "tax-free" going out just because they were in a CTZE for part of the year, but that won't be entirely accurate (unless they indeed were deployed all year or for whatever reason literally paid 0 taxes for the entire year).
So to answer the other question about SDP vs Roth investments while deployed, I would definitely take advantage of the SDP while deployed, since that is indeed a CTZE-only investment offering where the government is no-shit subsidizing your investment and paying you 10% of risk-free return (unheard of in the private sector). While maxing out the SDP in the deployed zone, you can still be following your regular investment plans into the Roth TSP, TSP, Roth IRA, or regular IRA as scheduled. You can continue your Roth investments on a monthly basis throughout the year, or a lump sum at the end of the year, or for the imaginary benefits of tax-free inputs, you can tailor your Roth investments to only take place during the months you are deployed. Either way, you can do SDP at the same time.
My personal strategy is to do a lump into our Roths at the end of the year, because I want to be sure that I didn't mess up my tax calculations with my side business, investments, mortgage interest, etc. and owe the IRS money at the end of the year. I almost always get a big refund as planned, and then just use that for the Roth contributions. By the way, you can contribute to the Roth IRA up until tax day (April 15) of the next year. In other words you have until April 2013 to contribute into the 2012 Roth.
Again, in the end, the decision to go Roth or traditional should be decided when looking at your tax rates for the entire year (did I mention that before?) and not by mentally separating out CTZE income from regular income, because they are essentially the same when look at your income over the course of the entire year.