Vanguard 401(k) plans allow participants to borrow against funds available in their tax-deferred retirement accounts. While withdrawing funds before retirement age comes with heavy penalties, borrowing funds using a 401(k) as collateral for personal purposes has no tax or penalty consequences.
Loan on Vanguard 401(k) Plans
Vanguard has specific loan provisions when it comes to borrowing against 401(k) plans. Vanguard requires a minimum of $1,000 and a maximum of 50% of a 401(k) account's 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.
Repayment Terms and Fees
Depending on the purpose for taking the loan, the repayment terms may differ. If a loan is taken for general purposes, such as buying a car or furniture, Vanguard requires a participant to repay his loan within five years. However, if the loan proceeds are used to purchase a principal residence, Vanguard allows up to a 15-year term for the loan.
As of 2018, 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 a maintenance fee of $25. Because an owner of a 401(k) account does not make a withdrawal of funds when taking a loan against his account, there are no tax implications for his actions. Additionally, Vanguard charges interest on a 401(k) loan, and the rate changes with debt-market conditions.