Do I have to pay Zakah on 401k money? 401K is a company-sponsored benefit allows employees to invest money from their paychecks into an investment vehicle on a pre-tax basis, meaning no taxes will be charged for investing until the employee decides to make a withdrawal from his or her plan at the age of 59 1/2. Meaning thatI CANNOT take this money unless I reach the retirement age or I leave the company. The money is also subject to increase or decrease as it could be invested in the stock market (I choose halal stock for sure).
In the Name of Allah, The Ever-Merciful
According to Justice Mufti Taqi Uthmani, a renowned and respected scholar in the field of finance and economics, it is permissible to invest in common stocks as long as the company one is investing is in compliance with the following conditions:
1. The main business of the company is not in violation of Shari‘a. Therefore, it is not permissible to acquire the shares of the companies providing financial services on interest, like conventional banks, insurance companies, or the companies involved in some other business not approved by the Shari‘a, such as the companies that manufacture, sell of offer liquors, pork, haram meat, or involved in gambling, night club activities, pornography etc.
2. If the main business of the companies is halal, like automobiles, textile, etc. but they deposit their surplus amounts in an interest-bearing account or borrow money on interest, the share holder must express his disapproval against such dealings, preferably by raising his voice against such activities in the annual general meeting of the company.
3. If some income from interest-bearing accounts is included in the income of the company, the proportion of such income in the dividend paid to the share-holder must be given charity, and must not be retained by him. For example, if 5% of the whole income of a company has come out of interest-bearing deposits, 5% of the dividend must be given in charity.
Based on what we have examined it is, therefore, permissible to invest in a 401K plan as long as the mutual fund selected is in compliance with the Shari‘a.
Allah knows best,