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401(k)s offer a powerful way to grow your retirement savings. But are they halal? Below we’ve broken down how they work – and how to navigate them as a Muslim investor.
A 401(k) is a common employer-sponsored retirement plan in the United States. The name itself refers to a section of federal tax law – Section 401(k) – that set out the rules for such retirement plans back in 1978.
With 401(k)s, employees choose how much of their salary to set aside and invest as part of a retirement plan. After the age of 59.5, you can start drawing on the funds without penalties.
401(k)s have major tax benefits that can maximize your retirement savings.
In a traditional 401(k), whatever is set aside remains tax-deferred. That reduces your current taxable income in the here and now.
Also, since you are likely in a higher tax bracket now than you will be during your retirement years, you’ll probably face a lower tax bill on the same money when you pay the taxman later on.
Also, the investments grow tax-free until you start withdrawing during retirement. That means more money can be re-invested through compound investing, growing your nest egg faster.
Read more: Compound Investing Vs. Simple Investing: Key Differences Explained
To attract top talent, companies often offer matching contributions, at least up to a certain percentage of your salary (specific details vary, so check your employer’s 401(k) plan).
Employer contributions are essentially free money for your retirement, a huge incentive to be responsible with your savings.
Each year the IRS sets a maximum annual limit for 401(k) contributions, which varies according to age.
As employees get older, they’re allowed to set aside more for tax-deferred investment. In 2025, the IRS capped the maximum amounts as follows:
1- Employees under 50: can contribute up to $23,500 as individuals, with the combined employee-employer contribution permitted to reach $70,000.
2- Employees 50-60: can contribute up to $31,000 as individuals, with the combined employee-employer contribution permitted to reach $77,500
3- Employees 60-63: can contribute up to $34,500 as individuals, with the combined employee-employer contribution permitted to reach $81,250
A Roth 401(k) is a similar concept, except contributions are instead made with after-tax dollars. In other words, you pay taxes now, but the money grows and is withdrawn later on, tax-free.
A Roth 401(k) is ideal for someone who expects to be in a higher tax bracket during retirement than they are currently (for example, a young professional).
Some people spread their retirement savings between a traditional 401(k) and a Roth 401(k) to balance their tax exposure during retirement.
So, do 401(k)s comply with Islamic principles? The answer is “it depends.”
The structure of a 401(k) is not inherently haram. It’s simply a system for diverting part of your salary into a pool of investments that includes a variety of securities.
The question we have to ask is: Are these underlying securities halal? As usual, this requires some due diligence to ensure that the companies or funds don’t rely on interest-earning, or engage in unethical activities or highly speculative ventures.
Most 401(k)s have a limited set of investment options which are pre-selected by the employer. It’s typically a mix of things like mutual funds, index funds and ETFs. The easiest thing to do is request the list of investment options from HR and see which, if any, are sharia-compliant.
Pro tip: You can use halal screening services like Zoya, Islamicly, or Musaffa to type in the ticker symbols or company names and see if they are sharia-compliant.
A growing number of employers are offering what are known as self-directed brokerage accounts (SDBA),
where you can choose and manage your retirement plan investments – even as they remain nested in the 401(k) and retain benefits like matching contributions. This of course requires taking time to choose halal investments (advice on that below).
If choosing halal investments within your 401(k) is not an option, you can pursue a Self-Directed Independent Retirement Account (IRA).
With an IRA, you manage your own investments without employer involvement (sadly, that means no matching contributions). If you already have a 401(k), you can even roll over your 401(k) into a new IRA and choose halal investments.
With self-directed IRAs, you can similarly choose between a traditional IRA and a Roth IRA, meaning you can choose whether or not to defer taxes until retirement, just like employer-sponsored 401(k)s.
You can open a self-directed IRA at a major brokerage firm and choose halal-compliant securities yourself.
Or, for those who don’t want to spend time screening securities, you can open an account with one of the growing number of Islamic finance institutions that offer sharia-compliant retirement plans. Examples include Wahed Invest and Saturna Capital.
For self-motivated halal investors, there’s a growing number of index funds and ETFs that specialise in sharia-compliant security.
Popular ones include the Wahed FTSE USA Sharia ETF (HLAL), which invests in common large-cap and mid-cap US stocks, and the SP Funds S&P 500 Sharia Industry Exclusions ETF (SPUS), which filters out non-compliant S&P companies.
Read more: How Can A Muslim Investor Choose The Right ETF?
If nothing above seems suitable, there’s still many good halal options for retirement planning. Consider a few of the following:
Many Islamic banks offer accounts that comply with sharia principles by avoiding interest, often through profit-sharing models. An example in the US is UIF.
Read more: All You Need To Know About ISAs (Islamic Saving Accounts)
You can either buy property, which tends to appreciate over time, or invest in sharia-compliant Real Estate Investment Trusts (REITs), which pay out returns based on the rental incomes of pools of properties.
Read more: Conventional REITs Vs. Islamic REITs, And The Case For Investing In Them
This is a specialized IRA that allows investors to hold gold or other precious metals like silver, platinum and palladium.
They are set up with pre-tax or post-tax funds, like other IRAs. Keep in mind they typically come with higher fees because you have to purchase and store precious metals.
Read more: Gold Vs. Other Asset Classes: Comparing Returns & Risks
Disclamer:
This post is for educational purposes only, and the Firm does not directly or indirectly provide these services.
