Halal Investing in the USA: Planning for your Retirement

You can think of your retirement fund as a seed. That seed has the potential to one day grow into a strong, flourishing tree, if it's planted in the right soil and given sufficient nutrients. That soil represents your investments, and just like the wrong soil can poison the growth of your tree, the wrong investments can damage the integrity of your retirement fund. 

Understanding which investment options are Halal

The unfortunate reality for Muslims is that the vast majority of investment vehicles that are available to us are not Shar’iah compliant. Let's review the context of what isn’t compliant so that you can more easily spot red flags in the future.

In the context of Islamic finance, Shar’iah law strictly forbids Riba (Interest), which is the earning of interest on loans or investments, as it's considered a form of economic injustice that cripples all those involved. It also prohibits investments in businesses that are harmful to society, such as those involved in profiting from riba, selling alcohol, pork, weapons, or those that exploit people or the environment. In upholding these ideals, we promote ethical and fair financial practices that not only lead to individual success but also benefit society as a whole. 

With this information in mind, lets review the most popular financial instruments that are available to our community to see whether or not we can use them to fund our retirement:

1. Stocks, Mutual Funds, ETFs: The workhorse behind many IRAs and 401ks, given that historical performance rates are higher than those of other asset classes, can be haram if they operate in any of the industries mentioned above. Considering the number of sectors we covered above, this can potentially include many companies, so you’ll want to be extra mindful of what you include in your portfolio. Keeping your portfolio halal* is manageable if you pick single stocks, but it can become a challenge when you’re investing in mutual funds and ETFs, as the holdings of some of these funds can be in the thousands.
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2. Savings Accounts: Despite their name, savings accounts should be at the bottom of your list of financial tools you can use to fund your retirement for a variety of reasons. Firstly, you earn money with savings accounts by earning interest (Riba) on the money in your account. Secondly, the interest that you earn in a savings account is often less than the inflation rate in any given year. As an example let's say that you have your retirement fund sitting in a typical Savings account with Chase bank, which earns 0.01% per year¹. According to the Bureau of Labour and Statistics, the interest rate for 2024 is going to sit at 3.1%². In this scenario, your savings are losing 3.09% of their value yearly. 
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3. Bonds: Much like savings accounts, bonds leverage interest in order to make you money - which, as we established above, is prohibited in Islam. From an investment standpoint, the returns you're likely to get on bonds fall somewhere between savings accounts and equities(stocks/ETFs/mutual funds), although they offer much more stability than the latter. 
   
   
4. Certificate of Deposit (CD): Certificates of deposits, much like bonds and savings accounts, are considered haram because they involve earning a fixed amount of interest (Riba). From a returns standpoint, you’d still be losing money due to inflation if you had allocated funds to a CD in 2024 -  returns for CDs in the US are 1.77% and 1.43% for one-year and five-year terms, respectively³, while the projected rate of inflation for 2024 is 3.1%². 

You’re probably thinking to yourself, what exactly am I supposed to invest in then? 

Well If you were to invest with Wahed, we’d do all the heavy lifting involved in making sure the investments funding your retirement are halal. We offer our clients access to globally diversified portfolios made up of ETFs, Sukuks, and Gold. We ensure that all our investments are strictly shar’iah by rigorously screening everything through our Shar’iah Supervisory Board, so that you can rest assured that your investments and returns are Halal. 

Getting to know the right tool for the job

We’ve covered off the kind of investments you want to make up your retirement fund, but what should be the vehicle driving your funds towards a healthy future?

Well, you don’t have to look very far as the Individual Retirement Account (IRA) was specifically designed to help you save towards your retirement.

In its simplest form, an IRA is a savings account designed to help you save for your retirement by offering unique tax benefits.

If retirement is your long-term financial goal, an IRA's tax benefits can significantly accelerate the growth of your investments over time compared to any other account.

There are various IRA flavours, but for the large majority of people, the Traditional IRA or Roth IRA will be their account of choice. That's why we’ll review those in a bit more detail to help you make the right choice.

If we had to point out the main differences between the two accounts, it would be that with a Roth IRA, you are taxed today, so your contributions (the money you put in) and your earnings (the money you make from what you put in) can grow tax-free. Because contributions are made with after-tax dollars, your withdrawals upon retirement are also tax-free. 

With a Traditional IRA, your contributions immediately lower your taxable income, giving you more cash upfront to invest. Your contributions and earnings grow tax-deferred, meaning that you pay tax on both the principal and earnings when you begin to make withdrawals. 

So what does that mean for you? 

Well if you’re a Gen-z or millennial that has yet to reach their maximum earning potential, making contributions to a Roth IRA account would be beneficial if you plan on being in a higher tax bracket upon retirement. The reason being that the taxes you’d pay today at a lower tax bracket would be less than the ones you’d pay tomorrow when you begin to make withdrawals⁴. 

Conversely, if you’re a little bit further along in your retirement journey and are at or close to your highest salary figure, it would make sense to make contributions to a Traditional IRA so that you can invest more upfront and pay taxes at a lower bracket upon retirement⁴.

We’ve condensed all this information for you in easy to digest graphic:

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If you’d like to learn more about the Pros & Cons of IRAs, you can check out the piece we published or visit the IRS website. Also please remember that we can provide advice but before making any major changes it's always best to consult with your tax or financial advisor.

The last thing you’ll want to consider to keep the integrity of your halal investments intact is whether or not your account provider offers purification services. Purification in islamic finance is the process of cleansing an investment of any unintentional income that may have been acquired through means that are not Shar’iah compliant, which protects the investor from profiting off activities that are forbidden in Islam⁵. 

Selecting the Right Partner for a Riba-Free Ideal Retirement

Given the number of factors we’ve listed above, it's no wonder that the number of options that Muslims have to fund their retirement is so low. However, with that being said, Wahed is tailor-made for investors who are concerned about shariah compliance. All our halal investment options are rigorously screened by our Shar'iah review board to maintain their integrity while our investments committee looks after the health of our portfolios while also structuring them according to the strictest islamic principles. 

If you’d like to learn more about Wahed’s retirement investment options, you can click on the button below: 

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We look forward to working with you in the future and if you have any questions please feel free to contact us at support@wahed.com.

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_Disclaimers: 

_{*The term 'Halal' denotes that it is permitted and follows Islamic law}

_{*For more information on IRA accounts please visit IRS.gov}

_{*Consult with your tax or financial advisor before implementing any plan changes as your situations may vary.}

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_Sources:

_Content:

1. _{https://www.investopedia.com/chase-savings-account-interest-rates-7566583}
2. _{Bureau of Labor Statistics (BLS) - Inflation Rate Projection for 2024: https://www.bls.gov/opub/ted/2024/consumer-prices-up-3-1-percent-from-january-2023-to-january-2024.htm}
3. _{https://www.bankrate.com/banking/cds/current-cd-interest-rates/}
4. _{Last-Minute IRA Contributions Might Lower Your Taxes - https://www.forbes.com/advisor/retirement/last-minute-ira-contributions/}
5. _{Purification of Shariah-Compliant Equities (bursamarketplace.com)}

_Graphic: 

_{​​1. Last-Minute IRA Contributions Might Lower Your Taxes - https://www.forbes.com/advisor/retirement/last-minute-ira-contributions/}