Vanguard allows participants to borrow against funds available in their 401(k) plan but certain conditions must be met. Here's a look at how it works and some of the pros and cons to consider before borrowing from your 401(k).

401(k) Loan Requirements at Vanguard

Participants can apply for a loan online or by phone. Vanguard has specific loan provisions when it comes to borrowing against 401(k) plans.

It requires a loan minimum of $1,000 and a maximum of 50% of a 401(k) account's vested balance up to $50,000. If a participant has an existing loan on a 401(k) account in the past 12 months, the maximum for a new loan is further reduced by the previous loan balance. Vanguard only allows up to two outstanding loans against 401(k) accounts and only one can be taken in a calendar year.

Key Takeaways

  • It’s possible to take out a loan from a Vanguard 401(k) as long as the employer sponsoring the plan allows it.
  • Certain requirements must be met, including how much can be borrowed and for how long.
  • Because 401(k) participants do not make a withdrawal of funds when borrowing from their account, there are no tax implications as long as the loan is repaid.

While Vanguard's 401(k) plans offer the ability to take loans, the employer sponsoring the plan may not allow participants to do so. Employers using Vanguard to administer their 401(k) plans can also add additional restrictions, such as the loan amount.

Repayment Terms

Depending on the purpose of taking the loan, the repayment terms may differ.

While withdrawing funds from a tax-deferred retirement plan before age 59½  typically comes with heavy penalties, borrowing funds using a 401(k) for personal purposes has no tax or penalty consequences as long as you repay the loan.

If a loan is taken for general purposes, such as buying a car or furniture, Vanguard requires participants to repay their loan within five years. However, if loan proceeds are used to purchase a principal residence, Vanguard allows up to a 15-year term for the loan. Only one loan can be used for a principal residence.

Vanguard charges interest on a 401(k) loan. The rate is determined by debt-market conditions.

Before taking out a loan on a 401(k) account, Vanguard requires an applicant to pay an application fee of $40 per loan issuance (it may be $90 if you get help from an associate over the phone). After that, Vanguard charges an annual maintenance fee of $25.

Pros and Cons of 401(k) Loans

Carefully review the pros and cons before deciding to take out a 401(k) loan.

Pros

  • You aren't subject to a credit check.

  • You are paying interest to yourself, instead of to a bank.

  • You have up to 15 years to repay if the loan is to help purchase a principal residence.

Cons

  • You lose out on tax-free growth of your retirement savings.

  • Vanguard charges application and maintenance fees to take out a loan.

  • If you leave the company before the loan is paid off, you have a limited period to repay it all—or the balance is treated as a distribution on which you owe taxes and may owe early-withdrawal penalties.

Advantages. Borrowing from your 401(k) has a few advantages over taking out a loan from a bank, including not being subject to a credit check. Also, you are essentially paying interest on the loan to yourself, instead of to a bank.

Drawbacks. Other than the fees, the major drawbacks are losing out on tax advantages and investment growth on the money borrowed, which can impede retirement savings goals. These drawbacks can often outweigh the benefits. In addition, if you leave the company before you have fully paid back the loan, you will owe the balance within a specified period of time or it will be charged to you as a loan distribution, for which you will owe taxes and, possibly, early-withdrawal penalties if you are under age 59½ or are not fully vested in the plan.