43% of Homebuilders Are Cutting Prices as Builder Confidence Sinks to a 14-Year Low. A First-Time Buyer Taps $10,000 From a 401(k) and Discovers the IRS Break Applies Only to IRAs

A 35-year-old renter scrolling through new-home listings this fall notices something encouraging. Builders are suddenly willing to bargain. According to the National Association of Home Builders, 43% slashed prices in October, the largest share since 2020, with the average discount holding at 6%.

There’s a reason they’re eager to deal. In its Oct. 19 report, the association said builder confidence had fallen to 29, its lowest reading in 14 years. Prospective buyer traffic was also at its weakest since April 2012, excluding the pandemic’s initial shock in April 2020.

A Hypothetical Buyer Reaches for Her 401(k)

Picture a hypothetical buyer: 35, single and still employed, well short of the 59½ age line for penalty-free withdrawals. Her income puts her in the 22% federal bracket, which for single taxpayers in 2026 starts at $50,401 of taxable income.

Her plan permits hardship withdrawals for a principal residence, and she qualifies for one. She requests $10,000 from her traditional 401(k) to round out her down payment. She’s counting on a familiar tax break: first-time buyers can withdraw $10,000 early without the 10% penalty. What she doesn’t realize is that the exception applies to IRAs, not 401(k)s.

Why the IRS Break Skips Her 401(k)

The IRS allows qualifying first-time buyers to withdraw up to $10,000 from an IRA without the 10% early-withdrawal tax. That’s a lifetime limit, and the money generally must be used for eligible homebuying costs within 120 days. The exception doesn’t extend to 401(k)s, and it doesn’t erase ordinary income tax on the withdrawal.

Federal tax rules generally impose an additional 10% tax on retirement withdrawals made before age 59½, unless an exception applies. Qualifying for a hardship withdrawal gives her access to the money, but it doesn’t waive that charge. Some exceptions do cover 401(k)s, including leaving an employer during or after the year you turn 55. None fits this 35-year-old buying her first home.

What Her $10,000 Withdrawal Actually Delivers

Because the money went in pretax, the full $10,000 counts as ordinary income. If the entire withdrawal falls within her 22% federal tax bracket, that’s $2,200 in income tax, plus another $1,000 for taking it out early.

After accounting for those taxes, she’s left with $6,800, before any state income tax. To keep a full $10,000 after federal taxes, she’d need to withdraw approximately $14,706, assuming every additional dollar faces the same 32% combined tax rate. About $1,471 of that larger withdrawal would go toward the early-withdrawal tax alone.

The long-run cost is bigger. Left invested at an example 7% annual return, that $10,000 would grow to roughly $76,000 by age 65.

Cheaper Ways to Cover the Gap

Using existing savings avoids the retirement withdrawal tax hit, provided she can still maintain a reasonable emergency cushion.

A 401(k) loan, if her plan offers one, avoids income tax and the 10% early-withdrawal charge as long as she follows the repayment rules. But it creates another monthly obligation, usually paid from after-tax earnings, and the borrowed money is no longer invested in the market. If she leaves her job, her plan may require repayment of the outstanding balance. Otherwise, the unpaid amount could become a taxable distribution, potentially triggering the 10% tax. Special rollover deadlines may provide relief for qualifying loan offsets.

Moving money into an IRA could make the first-home exception available, but her current employer’s plan generally won’t let her roll over her salary deferrals while she’s still working there at 35. An old 401(k) from a previous employer offers another possibility. She could roll eligible funds directly into a traditional IRA, then withdraw up to $10,000 for qualifying homebuying costs without the 10% charge. She would still owe ordinary income tax, and a hardship withdrawal already taken from her current plan cannot be rolled over afterward.

Run This Math Before You Sign

Before requesting a distribution, check whether you have an old employer’s 401(k) that could be rolled into an IRA. Make sure you qualify for the first-time buyer exception and can meet its 120-day deadline. Then compare a 401(k) loan with the potential $3,200 federal tax bill from a hardship withdrawal, including what happens if you change jobs before repaying the loan.

Then put the discount next to the cost. On an example $400,000 home, a 6% price cut would save $24,000, matching the average discount reported by builders who cut prices in October. That’s an attractive deal, but a $1,000 early-withdrawal charge eats into the savings and leaves a smaller retirement account behind. Builders may be willing to negotiate this fall. The IRS still draws a hard line between 401(k)s and IRAs, regardless of the deal you get on the house.

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