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Fatwa CenterRuling on the 401K retirement plan
Question
Assalamu Alaykom,My employer offers a retirement saving plan (401k) which has several tax advantages in the US. The employer encourages employees to participate in the plan by matching up to 3% of the employees salary only if the employee participates. So for example, if I'm contributing 3% of my salary each pay to my 401k account, my employer will match all of my contribution. So with my salary that can amount up to 4356 dollars additional savings from my employer per year just for participating in the plan and saving money. However, any funds in the 401k account must be invested in stocks. The stock selection available to invest in is limited and most likely are all related to companies that deal with haraam (such as financial services). I'm also not allowed to withdraw my savings unless I reach retirement age or terminate employment. Also, the employer matching is discretionary and not guaranteed (based on company's performance), however, I've worked for my company for 2 years and they matched in both years (the company is generally doing very well). Lastly, to my knowledge the account does not earn interest, but I have yet to confirm this info, so if you could please detail your answer for both cases (if it earns interest and if it does not), I would be very grateful!I've read several conflicting fatwas, some argue that the benefits are too big and must not be sacrificed by Muslims and that one can purify his savings by giving all of investment earnings to the poor and take only the principle he saved along with the employer contribution. Other fatwas suggest that one must avoid 401k account all together as long there is no halal stocks to invest in. What is your opinion on that and if a Muslim already has an existing 401k, what is the steps he has to take? May Allah reward you for your help and good deeds, Thank you.
Answer
All perfect praise be to Allaah, The Lord of the Worlds. I testify that there is none worthy of worship except Allaah, and that Muhammad, sallallaahu ʻalayhi wa sallam, is His slave and Messenger.
As long as the contract entails investing the savings in unlawful activities, it is impermissible for a Muslim to partake in it even if this contract has some advantages such as exemption from taxes or the participant has the intention to dispose of the unlawful sum of this money.
A Muslim should only seek sustenance through lawful means and should not seek it through unlawful means. He should know that his sustenance is guaranteed. The Prophet, sallallaahu ʻalayhi wa sallam, said: “The Holy Spirit (Gabriel) revealed to my heart that no soul shall die until its sustenance and term are reached in full. So, fear Allaah and seek it (sustenance) with decency.” [Abu Nu‘aym - Al-Albaani graded it Saheeh (sound) in Al-Jaami‘ As-Saheeh]
Whoever has already taken part in such a transaction is obligated to desist and cancel it if possible. If not, he should dispose of the unlawful money earned through this transaction and the rest of his money is lawful. For more benefit, please refer to Fatwa 88934.
Allaah Knows best.
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