Sunday, May 26, 2024
No menu items!

Interest accrual, funds of a Shari’ah non-compliant 401k

Fatwaa ID: 2211

Assalamualikum warahmatullahi wabarakatu Ustadh. I have a traditional Roth and Roth IRA account with Shariah Portfolio.

Recently they said that there is little interest in cash as stated by the representative:

Interest Accrual on Cash portion-only for Retirement accounts:
At ShariaPortfolio, we do not invest in interest. We work with Schwab closely to ensure that the Investment accounts have the ability for non-interest accrual. However, for the retirement accounts, as explained over the call, we are bound by ERISA guidelines.

She said they have taken fatwa that those little interest which is usually few cents or dollars can be purified by donating that amount. They have zakat webinars and scholars have said that according to them.

What is your thoughts on this? Kindly let me know. Appreciate it.

Also before I had 401k with my previous employee which I stopped after finding out it might be haram. But there are funds inside there what should I do with that? Also I don’t think I can withdraw that also at this age.

Apologies for such a long text.

In the Name of Allaah, the Most Gracious, the Most Merciful.
As-salaamu ‘alaykum wa-rahmatullaahi wa-barakaatuh.

We commend you for your dedication to ensuring Shari’ah compliance of your investments. May Allaah Ta’aala place barakah therein. The answers to your queries are as follows:

  1. A non-consentual involuntary insignificant amount of interest accrued on one’s cash account due to legal regulations would not render the investment portfolio haraam. The investments will still be permissible. However, the accrued amount must be given away in charity to the poor and needy without any expectation of reward.
  2. When you eventually do withdraw, you may keep your principal as well your employer’s principal. As for the growth, you may keep that which is from Shari’ah compliant stocks and avenues. The rest must be given away in charity for purification without any expectation of reward. Most investment funds tend to track the S&P 500 as an index. Observing that conservatively, we notice that approximately 40% of it is Shari’ah compliant. Hence, this can be taken as a proxy for other investment funds, such as the one in question. The growth of this 40% will be deemed to be halaal while the growth of the non-compliant 60% will be haraam. Aside from the growth amount, the capital itself is halaal. You may use the above to determine your annual zakaah as well as your withdrawal.

It should be noted that the above retirement fund investments are subject to zakaah. Also, the Shari’ah compliance of the broker in question is beyond the scope of this fatwaa.

And Allaah Ta’aala knows best.
Mufti Muajul I. Chowdhury
Darul Iftaa New York

08/30/1445 AH – 03/11/2024 CE | AML1-9873

وصل اللهم وسلم وبارك على سيدنا محمد وعلى ءاله وصحبه أجمعين


Darul Iftaa New York answers questions on issues pertaining to Shari’ah. These questions and answers are placed for public view on for educational purposes. The rulings given here are based on the questions posed and should be read in conjunction with the questions. Many answers are unique to a particular scenario and cannot be taken as a basis to establish a ruling in another situation. 

Darul Iftaa New York bears no responsibility with regard to its answers being used out of their intended contexts, nor with regard to any loss or damage that may be caused by acting on its answers or not doing so.

References and links to other websites should not be taken as an endorsement of all contents of those websites. 

Answers may not be used as evidence in any court of law without prior written consent of Darul Iftaa New York.