401K participation - Is it allowed in Islam?

[Thees_Mar_Khan]

One of my friend is interested in participating in the company 401K program. He is not sure if this is Halal/Haram. Do any of guys are enrolled in any such programs and whats your take on this?

[SAPakFan]

What's that?? Please elaborate

[Quick Single]

Is it some type of marathon?

[Thees_Mar_Khan]

For those who don't know -


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A 401(k) is a type of retirement savings account in the United States, which takes its name from subsection 401(k) of the Internal Revenue Code (Title 26 of the United States Code). A contributor can begin to withdraw funds after reaching the age of 59 1/2 years. (See subsection "Withdrawal of funds" below for restrictions before that age.) 401(k)s were first widely adopted as retirement plans for American workers, beginning in the 1980s. The 401(k) emerged as an alternative to the traditional retirement pension, which was paid by employers. Employer contributions with the 401(k) can vary, but in general the 401(k) had the effect of shifting the burden for retirement savings to workers themselves. In 2011, about 60% of American households nearing retirement age have 401(k)-type accounts.[1]

The first brood of workers to widely adopt this style of retirement plan is beginning to retire, and the plans now appear to generally be falling short. According to a Feb 19, 2011 article in the Wall Street Journal, "the median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement." This according to a study commissioned by the Journal, and conducted by the Center for Retirement Research at Boston College.[1]

Employers can help their employees save for retirement while reducing taxable income under this provision, and workers can choose to deposit part of their earnings into a 401(k) account and not pay income tax on it until the money is later withdrawn in retirement. Interest earned on money in a 401(k) account is never taxed before funds are withdrawn. Employers may choose to, and often do, match contributions that workers make. The 401(k) account is typically administered by the employer, while in the usual "participant-directed" plan, the employee may select from different kinds of investment options. Employees choose where their savings will be invested, usually, between a selection of mutual funds that emphasize stocks, bonds, money market investments, or some mix of the above. Many companies' 401(k) plans also offer the option to purchase the company's stock. The employee can generally re-allocate money among these investment choices at any time. In the less common trustee-directed 401(k) plans, the employer appoints trustees who decide how the plan's assets will be invested.

Since 2006, another type of 401(k) plan has been available. Participants in 401(k) plans that have the proper amendments can allocate some or all of their contributions to a separately-designated Roth account, commonly known as a Roth 401(k). These "Roth" contributions will be collected and treated as after-tax dollars; that is, income tax is paid or withheld in the year contributed. Qualified distributions from a designated Roth 401(k) account, including all income, are tax-free. (A traditional 401(k) account is funded with pre-tax dollars and, in general, tax must be paid when the original contribution and earnings are withdrawn.) All employer matching funds are deposited into the account on a pretax basis, even if the employee's contributions are all Roth contributions. Employer contributions may be subject to vesting rules set by the plan documents requiring the employee to reach a certain number of years of service before they are entitled to keep the matching funds.

[SAPakFan]

Not too sure,you'll have to ask a mufti
What happens if a person dies before retiring,does his family get the money or do they lose the money

[Thees_Mar_Khan]

Originally Posted by SAPakFan Not too sure,you'll have to ask a mufti What happens if a person dies before retiring,does his family get the money or do they lose the money

I believe it goes to the beneficiares who are listed on the account.

[ZenBowman]

I thought interest was haram.

[Thees_Mar_Khan]

Originally Posted by ZenBowman I thought interest was haram.

Well thats where a clarification is needed. The money is invested in stocks/bonds which is profit/loss investment. You may end up losing your investment.

[saadibaba]

If one thinks investing money in stock market, mutual funds or bonds is not permissible in Islam than one should not open a 401 K acount. Its a pre- taxable portion of your paycheck that goes straight to an account which invests in stocks, bonds etc. based on your preference and one's employer than pays an amount to your 401 K account either matching the amount you have paid or something closer to that which also gets invested in stocks, bonds etc.

The great thing about it is its non taxable and your employer pays part of it from his pocket. You have the option to have either take the maximum amount allowable from your paycheck to go to 401 K or none at all. But like I said before, if your friends is ok with investing in stocks etc. and do not think of it as haram than 401 K is the same thing. But if he thinks its haram than 401 K will be haram too for him.

Now is investing in stocks, bonds and mutual funds haram or not, thats a long debate and something that should be addressed by religious scholars. If buying gold something that is considered by your friend as ok, than you can buy gold with your 401 K money, though I am not sure how one will do that and is it even possible. I personally invest the maximum amount allowable to my 401 K account. I have bought a mix of bonds, mutual funds and stocks through my 401 K money and plan to keep it there till I am 60.

In todays world one never knows how things will be in the future and how much money one will need when one retires, so the more money you have when you retire the better for you. Aparat from 401 K one should also consider Traditional and Roth IRA as an investement option. If you keep money in the mattress inflation will ultimately reduce the value of that money with the passage of time so its better if one invests their money. Real estate, gold, art etc. are also good options if stock market something you want to avoid.

Hope this helps.

[ZenBowman]

Originally Posted by Thees_Mar_Khan Well thats where a clarification is needed. The money is invested in stocks/bonds which is profit/loss investment. You may end up losing your investment.

Bonds are based entirely on interest, and even holding stocks in companies that deal with interest qualifies as interest.

[W63L35]

Originally Posted by ZenBowman Bonds are based entirely on interest, and even holding stocks in companies that deal with interest qualifies as interest.

What is dividend (as oppose to interest) then that your stocks earn?

[Thees_Mar_Khan]

Originally Posted by saadibaba If one thinks investing money in stock market, mutual funds or bonds is not permissible in Islam than one should not open a 401 K acount. Its a pre- taxable portion of your paycheck that goes straight to an account which invests in stocks, bonds etc. based on your preference and one's employer than pays an amount to your 401 K account either matching the amount you have paid or something closer to that which also gets invested in stocks, bonds etc. The great thing about it is its non taxable and your employer pays part of it from his pocket. You have the option to have either take the maximum amount allowable from your paycheck to go to 401 K or none at all. But like I said before, if your friends is ok with investing in stocks etc. and do not think of it as haram than 401 K is the same thing. But if he thinks its haram than 401 K will be haram too for him. Now is investing in stocks, bonds and mutual funds haram or not, thats a long debate and something that should be addressed by religious scholars. If buying gold something that is considered by your friend as ok, than you can buy gold with your 401 K money, though I am not sure how one will do that and is it even possible. I personally invest the maximum amount allowable to my 401 K account. I have bought a mix of bonds, mutual funds and stocks through my 401 K money and plan to keep it there till I am 60. In todays world one never knows how things will be in the future and how much money one will need when one retires, so the more money you have when you retire the better for you. Aparat from 401 K one should also consider Traditional and Roth IRA as an investement option. If you keep money in the mattress inflation will ultimately reduce the value of that money with the passage of time so its better if one invests their money. Real estate, gold, art etc. are also good options if stock market something you want to avoid. Hope this helps.

Thanks for the information. Stock business is quite common in pakistan as well so I think it should have some acceptance from a religious standpoint. Stocks in my view is loss/profit and it does not guarrantee profit only. Is there any way 401K yield any form of interest to the account holder (same as a saving account compared to checking account).

[saadibaba]

Originally Posted by Thees_Mar_Khan Thanks for the information. Stock business is quite common in pakistan as well so I think it should have some acceptance from a religious standpoint. Stocks in my view is loss/profit and it does not guarrantee profit only. Is there any way 401K yield any form of interest to the account holder (same as a saving account compared to checking account).

Yes stock is loss/profit. Generally, the higher the chance of profit the higher the risk of loss too. Stocks are the riskiest investment options out there.

401K account does not yield any interest, like CD's or savings account, its all based on your investments.

[Thees_Mar_Khan]

Originally Posted by ZenBowman Bonds are based entirely on interest, and even holding stocks in companies that deal with interest qualifies as interest.

Well in that case working for such company is not right. Living in a non-Islamic country is not right. You need somebody with knowledge to define such religious complications.

[saqlain]

401K has nothing which makes it "haram". It is an incentive offer by employers to their employees. Just take it or take the amount which the company is going to match. It is free money in a way.

[aashiqmizaaj]

Originally Posted by saqlain 401K has nothing which makes it "haram". It is an incentive offer by employers to their employees. Just take it or take the amount which the company is going to match. It is free money in a way.

A little caution here.

If a 401K plan has investments in the financial sector, weapons manufacture, alcohol, entertainment - essentially things that are deemed un-Islamic, then you need to be careful.

Some employers offer the 401K as a benefit. Others offer a pension plan as a condition of employment.

[saqlain]

Originally Posted by aashiqmizaaj A little caution here. If a 401K plan has investments in the financial sector, weapons manufacture, alcohol, entertainment - essentially things that are deemed un-Islamic, then you need to be careful. Some employers offer the 401K as a benefit. Others offer a pension plan as a condition of employment.

If you are so concerned about which type of company or investment is in your portfolio then simply dont do this and put your money under your mattress.

Lets be realisic here. Majority of the people living in the US take mortgage for house. So it is okay for you to pay interest but if its in your portfolio it becomes un-islamic, I donno what to say to those people.

[aashiqmizaaj]

Originally Posted by saqlain If you are so concerned about which type of company or investment is in your portfolio then simply dont do this and put your money under your mattress. Lets be realisic here. Majority of the people living in the US take mortgage for house. So it is okay for you to pay interest but if its in your portfolio it becomes un-islamic, I donno what to say to those people.

Investing in stocks is allowed, investing in bonds is not. From this point, there are further conditions. Now whether someone wants to follow this or not, is another matter, but you cannot pass it off as being allowed. That's all I'm saying. Your point about "there's nothing in a 401K that makes it haram" is not accurate.

You can always check if the employer 401K has any self-directed options. If it does, then you can have finer control over where you put your money.

[ZenBowman]

Originally Posted by W63L35 What is dividend (as oppose to interest) then that your stocks earn?

Dividend is a share of the profits. I am not religious btw, I meant to pose this as a question as I know interest is haram in Islam.

[waqar_ahmad]

Stocks
I know interest (Riba) is prohibited in Islam. I always thought that stocks are allowed, since they are based on profit and loss, and not interest. However, someone told me that when you buy stocks for a company, you become part owner. And if the company deals in interest, which almost all companies do, that means you are dealing in interest. This makes stocks haram.

The company that I work for, also offers stocks to its employees. So, now I am also skeptical about getting them

But some say that if you are not dealing in Riba, it doesnt matter if the company that you own the stocks for, does.

401k Retirement Plan
For those who dont know, in 401k plan, part of one's paycheck is invested in stocks, and the money then increases or decreases based on the stock losses or gains. Now, if stocks are haram, I am guessing so is this?

I would appreciate any comments, or guidance in this regard.

[youboy]

The following program cover about stocks

Zaid Hamid: Brass Tacks- Economic Terrorism Episode17(Final Episode) Part1



Zaid Hamid: Brass Tacks- Economic Terrorism Episode17(Final Episode) Part2



Zaid Hamid: Brass Tacks- Economic Terrorism Episode17(Final Episode) Part3



Zaid Hamid: Brass Tacks- Economic Terrorism Episode17(Final Episode) Part4



Zaid Hamid: Brass Tacks- Economic Terrorism Episode17(Final Episode) Part5

[LethalSami]

Originally Posted by waqar_ahmad Stocks I know interest (Riba) is prohibited in Islam. I always thought that stocks are allowed, since they are based on profit and loss, and not interest. However, someone told me that when you buy stocks for a company, you become part owner. And if the company deals in interest, which almost all companies do, that means you are dealing in interest. This makes stocks haram. The company that I work for, also offers stocks to its employees. So, now I am also skeptical about getting them But some say that if you are not dealing in Riba, it doesnt matter if the company that you own the stocks for, does.

if thats the case then living in the West is haram, b/c the whole economy is based on system that reliant on loans/interest.

all the corporations you buy stuff from, most people who u work for/ work with.............all deal in interest.......so its all haram

Not just the West either, Even most "islamic" countries deal in interest AND trade with people who deal in interest, its a Global Village Interconnected economy these days...

O Damn, i just realized we're living in a HARAM World

[youboy]

ZIONIST BANKING SYSTEM - SHEIKH IMRAN HOSEIN




Investing in The Stock Market, is it Halal or Haram? Sheikh Imran Nazar Hosein 2011

[LethalSami]

Youboy why don't u just summarize your POV instead of spamming us with YT links

[youboy]

Originally Posted by LethalSami Youboy why don't u just summarize your POV instead of spamming us with YT links

My POV is that I agree with what the Sheikh has said.

I personally try not to give personal POV especially in cases where Islam as a religion is being discussed. In my capacity I am no one to say it is halaal or haraam. So it is always better to have a view of a person who has studied the subject and is capable to answer on the topic being dicussed.

[waqar_ahmad]

Originally Posted by LethalSami if thats the case then living in the West is haram, b/c the whole economy is based on system that reliant on loans/interest. all the corporations you buy stuff from, most people who u work for/ work with.............all deal in interest.......so its all haram Not just the West either, Even most "islamic" countries deal in interest AND trade with people who deal in interest, its a Global Village Interconnected economy these days... O Damn, i just realized we're living in a HARAM World

Buying stuff from a company does not make you an owner in the company. Owning stocks of a company does make you an owner. So there is a difference.

Once again, I am not sure, hence the questions

[LethalSami]

yup 2 different questions...

ownership of a haram company
and doing business with a haram company

[Sjaloha]

I don't know why we are trying to make our lives more difficult. Especially when you read a post like this where a concept of a 401k Plan is seen as a choice between halal and haram. This is really really sad.

[lahori]

I am in the US and actively participate in a 401k plan, as far as halal/haram is concerned, there's a debate on this issue, but mostly from what I know, it is ok to participate in it, as long as you are careful where the funds constituting 401k are allocated.

For example if you have a large cap fund in your 401k whose top holding is Wynn Resorts (a gambling resort in Las Vegas) or a beer company like Budweiser, then its deemed as haram, and the best thing to do in that case is to reallocate the 401k to more Islamic friendly funds (if that option is available).

[lahori]

Originally Posted by Sjaloha I don't know why we are trying to make our lives more difficult. Especially when you read a post like this where a concept of a 401k Plan is seen as a choice between halal and haram. This is really really sad.

not sure where you're heading with that? In the US especially the private sector, the only logical choice for employer sponsored retirement is 401k. To not take benefit of that (both from employer contribution and also tax perspective) is rather foolish financially. In countries like Pakistan or India, there is concept of provident fund or pension however those are not available in US unless you work in goverment