Is 401k really helps in tax exemption?

The main difference between retirement savings in a 401(k) and a Roth IRA is the tax treatment. Funds can be contributed to a 401(k) plan on a pre-tax basis, while funds can only be contributed to a Roth IRA after income taxes have been paid on the portion of income from which they were drawn.

Upon withdrawal, 401(k) contributions and earnings are fully subject to income tax, while the earnings from a Roth IRA are entirely exempt from income taxes (the contributions are already exempt, in that the relevant income taxes have already been paid.)

Given the current fiscal situation in the U.S., with income tax rates becoming more likely to rise in the future due to the need to support significantly higher government spending levels, that makes the Roth IRA more desirable, because it would avoid the higher rates of taxation likely in the future.

The Smart Money article is likely noticing the comparative benefits of that tax treatment and recommending that investors with both options first contribute what their employer would match in their 401(k) plan, then contribute up to the maximum possible for their Roth IRA. For those lucky ones with income still left over looking to be placed for retirement, then it becomes a choice if they want to continue contributing to their 401(k) plan or some other vehicle.

anything you can do legally to reduce the amount of income tax you currently have to pay is probably worth it

401(K)'s are direct, and immediate, ie the amount you contribute is immediately subtracted from your gross and the remainder is calculated for the income tax amount

IRA's also reduce your gross income as well

so either is a tax savings any way you look at it

your income situation may be vastly different when you are able to take distribution of either which means you probably will not be liable for as much income tax as you are now in your better producing income years