Is 401k Halal Or Haram In Islam? Quick Facts
Is 401k halal? Are you a Muslim wondering if a 401k retirement plan is permissible under Islamic law? In this blog post, we’ll explore the concept of halal investing and how it applies to 401k plans.
As a Muslim, it’s important to ensure that your financial decisions align with your religious beliefs.
One of the most common questions that comes up in this regard is whether or not a 401k retirement plan is permissible under Islamic law.
Is 401k Halal?
No, according to Islamic scholars 401k is not halal. In Islamic finance, the term “halal” refers to anything that is permissible under Islamic law. This includes investments that are free from interest (riba), gambling (maysir), and speculative practices (gharar).
In order for an investment to be considered halal, it must also be invested in a socially responsible and ethical manner.
Now, let’s talk about 401k plans. A 401k is a type of retirement plan that is offered by many employers in the United States.
Participants in a 401k plan can contribute a portion of their income to the plan, which is then invested in a variety of different assets, such as stocks, bonds, and mutual funds.
The goal of a 401k plan is to save for retirement and potentially earn a higher return on investment than traditional savings accounts.
Why 401k is Haram?
In the case of voluntary subscription, it is not permissible to subscribe to 401k, because it is based on gambling and uncertainty.
The individual may take more than he paid or he may take less than that, and this is gambling.
Moreover, the money is deposited in riba-based banks, and it is well known that it is not permissible to deposit money in riba-based banks with the aim of getting the interest, because that is consuming riba and helping those who deal in riba.
As long as the contract entails investing the savings in unlawful activities, it is impermissible for a Muslim to partake in it even if this contract has some advantages such as exemption from taxes or the participant has the intention to dispose of the unlawful sum of this money.
A Muslim should only seek sustenance through lawful means and should not seek it through unlawful means. He should know that his sustenance is guaranteed.
The Prophet, sallallaahu ʻalayhi wa sallam, said:
“The Holy Spirit (Jibreel) revealed to my heart that no soul shall die until its sustenance and term are reached in full. So, fear Allaah and seek it (sustenance) with decency.”Abu Nu‘aym – Al-Albaani graded it Saheeh (sound) in Al-Jaami‘ As-Saheeh
According to Mufti Muhammad Ibn Muneer, 90% of the money people contribute to their 401K is invested in haram stocks or companies they are unaware of.
Because there is no knowledge of where the contributions are going, it is too risky and most likely haram.
Investing in companies in the following industries are known to be haram and are known to be non permissible for muslims:
- Adult entertainment
- Pork products
- Interest-based businesses
- Music, cinema or broadcasting
- Highly leveraged businesses
Interest is another point he makes, if the contributions you make end up making you more money but from interest (this typically happens when the 401K contributions end up being invested in bonds which yield a positive return from interest), then that is considered haram.
- Learn also whether life insurance is halal or not.
However, Sheikh Assim Al Hakeem said if the 401k is mandatory by law, whether you like it or not, and your employer likes it or not, the government mandates that any employee has to pay a certain percentage of their salary and the employer has to contribute a certain percentage from their basic salary.
They collect this in a fund for the government and once he reaches the age of retirement, he can receive a salary every month till the day he dies. In this case, it is halal.
Listen To what he said below:
Investing in mutual funds will be permissible if the mutual fund invests only in stocks in which the company one is investing in is in compliance with the following conditions pointed out by Mufti Taqi Saheb (Hafidhahullah):
- The main business of the company is not in violation of Shariah. Therefore, it is not permissible to acquire the shares of the companies providing financial services on interest, like conventional banks, insurance companies, or the companies involved in some other business not approved by the Shariah, such as the company’s manufacturing, selling or offering liquors, pork, haram meat, or involved in gambling, night club activities etc.
- If the main business of the companies is halal, like automobiles, textile, etc. but they deposit their surplus amounts in an interest-bearing account or borrow money on interest, the shareholder must express his disapproval against such dealings, preferably by raising his voice against such activities in the annual general meeting of the company.
- If some income from interest-bearing accounts is included in the income of the company, the proportion of such income should be given in charity and must not be retained by him.
For example, if 4% of the whole income of a company is accrued from interest-bearing deposits, then 4% of the dividend should be given in charity.
Note: One should ask the mutual fund manager to source the appropriate financial statements in order to determine how much interest was earned by the company in which the stocks were invested.
The shares of a company can be purchased only if the company owns some non-liquid assets.
- If all the assets of a company are in liquid form, i.e. in the form of money, then that cannot be purchased or sold, except on par value, because in this case the share represents money only and the money cannot be traded in except at par value.
From: An Introduction To Islamic Finance – Maktaba Ma’ariful Quran Pg: 207
It will be permissible for you to take out a 401K investment scheme in mutual funds provided that it is Shariah compliant.
We advise you to consult with a local reputable scholar in your area who is well versed with these issues to help you choose one which is Shariah compliant. Allah knows best.