401k Hardship?

Question

Hi, I am muslim and i am contributing into my 401k. But i recently discovered that all my mutual funds in 401k have some kind of dealing with interest. so therefore i cant have that money or contirbut in 401k.This is serious Relegious issue. I am thinking to take that moeny out by hardship and put into mutual funds that are design for muslime. Is it possiable to do that or i am open to any suggestion.

Answer 1

Well, there's good and bad news. Bad news first.

You can't take a hardship withdrawal to put the money in another plan, ever. Hardship withdrawals are only allowed for 6 reasons outlined by the IRS:
1. purchase of a principal residence
2. avoiding eviction or foreclosure of your home
3. medical expenses
4. post-secondary tuition expenses
5. repair of catostrophic damage to your principal residence
6. funeral or burial expenses for an immediate family member,
and it is actually up to your employer to accept the last two reasons. And even in that situation, it's only a withdrawal of your contributions, without earnings. The bottom line is that there is money in your account that you won't be able to take out until you stop working for your employer. There is no religious exception.

But there is some good news.
There might be some money in your account that you can take out to transfer to another retirement plan. This is called a "rollover." You need to call the company that administers the plan to find out what the rules are.
Plus, you can transfer everything out into whatever account you want as soon as you leave your employer.

Now as far as "interest" is concerned: make sure to get clarification on what is interpreted as "interest" by your religion. The mutual funds in your account are probably three types - money markets funds, bond funds, stock funds. Money market funds always pay a dividend once a month that you might call "interest," but in financial terms, we always call it a "dividend." Most bond funds also pay a dividend. And most stock funds pay a dividend regularly too.

However, dividends from stock funds might not be considered "interest" because owning stock is not lending money. When you own stock, you are a part owner of the company, so when you get a dividend payment it's really just earnings that rightfully belong to you. Stock dividends are not interest. So owning stock funds would be OK as long as the companies are otherwise OK according to your Islamic principles.

Answer 2

I've been looking for your answer and came up with something. Your religion says for you not to keep the interest. The key word is keep.

Ignore dividends as interest, because a share is where you own part of the company and like any business owner, you are getting a cut of the profits. Focus on bonds and money market interest that you will be getting.

Figure out the percentage the fund manager is getting. Figure that the money that some of the money that is collecting interest is actually going to the fund manager and not to you. When you take money out, you will be taxed on that money. That money is going to the government and not to you. You are giving "Caeser" back his money. Figure the interest gained is going to taxes.

If you have figured you have interest money left over give it to charity.

http://muslim-investor.com/mi/purification.phtml