Can one contribute their max annual limit to their 401K in 2023 to defer capital gain liability from the sale of an investment property in 2023? Reducing tax liability?

[Edwin Calzaretta]

The property was not originally purchased with funds from a 401k/retirement account.

[tagteam]

401(k) contributions are pre-tax. What are you trying to accomplish?

@dmertz 

[dmertz]

There is no deferral of a capital gain.  Deferring more of your compensation to a traditional 401(k) simply reduces taxable income.  That doesn't change how much of a capital gain is includible in income, but a reduction in taxable income it could reduce the tax rate that applies to your capital gain if the capital gain is long-term.

It's a bit late in the year to alter your deferral to a 401(k) unless you are self-employed and elect a one-time 401(k) deferral.  Unless 2023 would be the first year for a solo 401(k), the deadline to make the deferral election is year-end 2023.

[Edwin Calzaretta]

Thank you for the reply! This is helpful. In this specific scenario, I have not made any contributions to my 401k this year. With the sale of the investment property, I have a capital gain tax liability of about $400k. If I contribute the max annual contribution to my 401k ($30k, I am well above 50 years old) for 2023, will I be deferring/reducing the capital gain tax liability from the sale of the investment property? Ex. $400k from sales proceeds - $30k contribution to 401k = $370k capital gain tax liability for 2023. Hope my question makes sense and thank you in advance.

[Edwin Calzaretta]

Sorry, I just read the beginning half of your response. I see you said, contributing to the 401k does not reduce the capital gain liability. But it may place someone in a lower tax bracket. Thank you for your insight here.