Suppose you have $100,000 "locked" into a traditional IRA.
You work at an employer that will match 50% of your 401k contributions (any amount up to 18K limit). Vesting is immediate.
Suppose you want to buy a house and would rather put funds toward a downpayment than contribute the full 27K (after match) to your 401k this year.
You are faced with two options (and a spectrum in between that I'm ignoring for now):
Make no 401k contribution; put the 18K towards the down payment. Let's assume your tax rate is 30% so you have 12.6k after tax for your downpayment. Net effect: personal account +12.6K, retirement: 0.
Make full 18k contribution and receive 9k match. Withdraw 27K from the IRA: pay 30% tax + 10% penalty. Net effect: personal account + 16.2K, retirement: 0 (though IRA is down 27K and 401k is up 27K).
In this scenario between the two extremes, option 2 makes more sense. Am I missing something? Also, I realize you can pull 10K out of your IRA for a house downpayment without penalty but I'd like to ignore that for the purposes of this comparison.