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Non-Halal 401K fund choices, no self directed option

Salam,

My employer does not offer Halal funds in the 401K plan, neither do they have option for Self-directed option. Not participating mean no employer contribution, what to do?

Salaam and welcome, @hawk666! It really boils down to personal preference but the most common advice I’ve seen from scholars (including our very own Sh. @Joe Bradford) is that it’s better to opt for the least bad option rather than to not participate in your company’s 401k at all. This typically ends up being the fund that is 100% equities-based vs funds that have a mix of equities and bonds. It’s also a good practice to estimate and purify your holdings on an annual basis to account for the impermissible portion of the fund.

If you have multiple options for funds that are 100% equities-based, feel free to free to list them here so we can take a closer look and identify the one with the least exposure to non-compliant stocks.

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I want to thank you and your team for all the great work that you are doing. May Allah SWT bless you and bless the team members for that effort.

Here are some of the funds:
FXAIX
PEIYX
SICWX
QUAYX
FSMDX
FSSNX
MLAIX
PSMKX
TRMCX
VSIAX
RERGX
ODVYX
VTWAX
DFSTX
VIEIX
VIIIX
VWNEX
DFIEX
VTSNX

I ran your list through Zoya’s new fund screener. The feature is still in beta and has a limited mutual fund universe so I wasn’t able to research all of them. However, among the symbols that were supported, it appears MLAIX has the least amount of non-compliant holdings (~6.4%). I hope that helps!

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Salaams brother Saad,

I hope you’re well. I’ve always wondered how one is supposed to purify the non-shariah compliant part of a 401k fund annually? Because there are restrictions on withdrawal - so would it have to come out of money you have somewhere else?

And then curious if someone would have to pay zakat on the part that is non-shariah compliant that we plan on purifying?

Yes, that would make more sense than doing an early withdrawal and paying tax + penalty.

In Sh. @Joe’s book Simple Zakat Guide, he suggests that you absolve/purify yourself of any haram earnings prior to calculating zakat.

What do I do with Haram earnings?

Ibn Hibbān narrates from Abu Huraira that the Prophet ﷺ said:

“When you’ve given the Zakat of your wealth then you have fulfilled your obligation. Whoever gathered impermissible wealth then gave it in charity will have no reward for doing so and its sin will be upon him.”

Based on this hadith, all scholars both past and present agree that it is imperative to absolve oneself of any Haram earnings. Regardless of whether those earnings are from interest bearing accounts, business transactions, or investments.

Bradford, Joe. Simple Zakat Guide: Understand and Calculate Your Zakat (Kindle Locations 829-836). Origem Publishing. Kindle Edition.

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Great thank you so much for the response!

I’m going to press you a little further here cause I’m thinking of the perspective of my clients.

What if someone doesn’t have other pots of money to pull from? And what if the other pots aren’t enough? This will become a huge problem as someone invests in their 401k year after year and the investments start compounding (especially after they hit $100K)

It doesn’t make sense to keep pulling out the money from your 401k year after year and incurring taxes and the 10% penalty so you can purify. And most people won’t have another pot of money to pull from. Honestly it might get to a point where the taxes + penalty incurred might not make the 401k benefits worthwhile. The tax deduction/tax sheltering and employer match you get from your 401k may not make up how much you have to pay to purify.

There has to be another solution cause I know a lot of folks in this situation and neither of those options make a lot of sense.

This is an interesting question, but I’m afraid I’m not qualified to answer it.

I should have clarified earlier that there are two opposing views regarding zakat on your retirement accounts. One of our shariah advisors, Sh. @Joe, subscribes to the opinion that you don’t need to pay zakat on your 401k/IRA unless you withdraw from them. On the other hand, Sh. @umerkhan (also on our shariah advisory board), subscribes to the opposing opinion that you should pay zakat on them regularly regardless of whether or not you’re do any withdrawals.

So depending on which opinion you personally choose to follow will ultimately to determine your financial plan going forward.

On a side note—we’re working on a zakat and purification tool that will hopefully make all of this a little easier.

Gotchu! Looking forward to the tool inshallah.

I’m curious if you could direct this question to Sh. Joe since you have access to him? The majority of my clients are in this position and I don’t want to dissuade them from using their 401ks but it has to make financial and mathematical sense.

I’m sure Sh. Joe has come across this question often so there has to be a solution.