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Invested in a 401k program that is Shari’ah non-compliant

Fatwaa ID: 2207

asalamualaikum wrwb

Someone has asked this question, please if you can advise

“I participate in the 401K program offered by my employer. A monthly contribution is automatically deducted from my pay check and my employer contributes to my 401K as well. Where these funds are invested is fully controlled by my employer and I fear that to maximize gains, my company is investing in non sharia compliant companies. I cannot withdraw the principal or gains from my 401K until retirement.

Question 1 -: Should I be paying zakat now on my contribution to my 401K or wait until retirement when I have access to those funds and pay zakat then?

Question 2- knowing that my companies is investing in non shria compliant companies, should I stop contributing to the 401K? or should I keep contributing and when retirement time comes, donate the gains to a charitable cause and keep the principal?

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

At the outset, it is necessary to ensure that one’s investments are Shari’ah compliant. A 401k retirement plan is only permissible if the investments are made towards Shari’ah compliant avenues. If investments are made towards Shari’ah non-compliant avenues, then the returns therefrom will be haraam. Nevertheless, the answers to your queries are as follows:

  1. Your contributions as well as the contributions of your employer that have been vested are subject to annual zakaah. You may discharge the zakaah of the above annually or backdate it for all the years upon withdrawal of the funds. The zakaah is necessary on it annually despite not having access to the funds because the investment is voluntary.
  2. If you are able to change your investments or opt for a Shari’ah compliant broker or portfolio, then you should do that. If you cannot, then you should stop contributing. You should not let it continue to grow if the portfolio is Shari’ah non-compliant. 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 zakaah as well as your withdrawal.

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

08/25/1445 AH – 03/06/2024 CE | AML1-9871

وصل اللهم وسلم وبارك على سيدنا محمد وعلى ءاله وصحبه أجمعين


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