401k And Islam?

Question

Hi, I need some help here every one. I am contributing into my 401k but recently i find out that Islamic principles require that investors share in profit and loss, that they receive no usury or interest, and that they do not invest in a business that is not permitted by Islamic principles. Some of the businesses not permitted are liquor, wine, casinos, pornography, insurance, gambling, pork processing, and interest-based banks or finance associations.

The Funds do not make any investments that pay interest. In accordance with Islamic principles, the Funds shall not purchase bonds, debentures, or other interest paying obligations of indebtedness. Now i would like to take hardship on my 401K and put int funds that are designed for Muslim or if you have any idea please let me know.

THanks-

Answer 1

Unless you completely not participate in the 401k, or if they can assure you that it is being invested by these principals, there is no way for you to do it.

The overwhelming majority of mutual funds do invest in debt, which includes US bonds, bank bonds, or other interest creating methods like money markets. That goes for equity funds as well. Unless you can research each holding in the funds, you will not be able to satisfy your need. Also because the holdings may change & you will hold it at another time.

If you are concerned about the clash of religion & investing, you will have to go with funds that specialize in Islamic rules. 401ks tend to not have that type of offering.

Answer 2

I don't claim to be an expert of Moslem principals, although I have studied the issue you raise.

If your company has a limited selection of funds (most do), you may not be able to invest in any of them for the reasons you cite.

However, many 401(k) plans include the "ultra-low-risk" option of buying government bonds, keeping the money as cash, etc. While they don't earn much (if anything), they might be worth using (if your religion prohibits other options) simply for the tax-deferral benefits.

Ultimately, if your religion and your company 401(k) are in conflict, you will need to elect not to use the 401(k). You will need to use an IRA, instead. In that case, you have the power to make choices that are consistent with your faith.

You cannot force your 401(k) to allow you to invest in a way that is inconsistent with the plan. Unless your company forces you to participate, this would not be illegal discrimination under US law.

Answer 3

Does your religion allow you to sit on the sidelines and lose money? That's what you're doing by not investing in the market. I'm sure Allah will forgive you...There are Muslims engaged in much worse forms of sin around the world (ie suicide bombers).

If you follow your doctrine to a tee, you can't invest in anything, because most fund managers have at least a very small portion of their allocation in bonds--even if it is an equity fund. Money market is out cause it pays interest...so in essence, you're screwed. You can't even take the money out because then you're paying a 10% penalty to the IRA, which, essentially is YOU paying interest to the Federal Government-also taboo.

Answer 4

Hi, I answered your other question about hardship withdrawals too.

Unfortunately, the answer is that you cannot take a hardship withdrawal to put the money into another retirement plan. It is simply illegal under IRS regulations. You will have to leave your contributions in your 401k plan unless you have to withdraw to pay for one of the 6 reasons I mentioned in my other answer.

There might be part of your 401k that you can withdraw for your purpose though. You need to call your plan's administrator and ask, "What portion of my account can I withdraw to rollover to another retirement plan?"