Rolling Over Your 401k to a Halal IRA

So, here's the deal: you've left your job or landed a new one, and now you're wondering what to do with your 401k. If you want to rely on something other than your former employer's plan administrator to dictate your financial future, rolling your 401k to an IRA is probably your next move. 

So, what is a 401k rollover? When you strip away the industry lingo, a 401k rollover is simply transferring your money from one tax-advantaged account to another that you have some control over. 

Why are 401ks problematic for Muslims?

The problem for many Muslims living in the West is that the financial eco system is built in a way that is in complete contrast to the principles of Islam. Having said that, the vast majority of 401ks are structured in a similar fashion and contain holdings that go against what is permissible under shar'iah law.

Your typical 401k might include asset classes such as bonds that leverage riba to turn a profit or ETFs and mutual funds that have holdings operating in sectors that are deemed harmful to society—such as gambling, alcohol, and tobacco. In either case, both examples should be excluded from your portfolio if you're trying to keep your investments halal*.

Let's dive a little bit deeper into the two asset classes mentioned above:

Stocks/Equities:

Providers typically offer access to stocks through index or mutual funds. Whether a fund is Halal hinges entirely on the companies (holdings) within that fund, which would require you to do your own analysis, a task that can be both time-consuming and complex. Things get even more complicated when you take into account that these funds are constantly updating their holdings, forcing you back to the drawing board.

Bonds:

When you purchase a bond, you lend money to a company or government in exchange for interest. This definition mirrors that of Riba, thereby making the asset class forbidden as per the Quran. However, the problem with removing bonds from your portfolio is that you've now opened it up to a greater degree of risk, which is why many in our community are willing to compromise and leave them as part of their portfolio.

Just how common are haram investments in my portfolio

Let's look at a real-life example to illustrate how common it is to find haram investment options in your 401k. After doing a little research, we identified a universal provider that held the Russell 3000 Index. The index measures the performance of the 3000 largest publicly traded US companies and represents 97% of the investable US equity market, therefore serving as a great benchmark for the entire US stock market¹.

Many universal providers will have Index funds like these so that clients can benefit from the growth of the US economy, which makes complete sense.

Upon reviewing the holdings of the Russell 3000 Index, you'll find companies like Bank of America and Bank of New York included. Considering that both of these companies rely on riba (usury) to generate profits, the asset would be non-compliant within the confines of Islamic finance.

The Solution: A Halal IRA

Switching to a Halal IRA, like the ones offered by Wahed, is a great option for Muslims who are looking to invest in their future without having to compromise their faith. Below is what sets us apart from your conventional IRA: 

1. Strictly Shar'iah: Investments are rigorously screened to exclude companies involved in prohibited activities by our Shar'iah Supervisory Board.
2. Diversified Halal Portfolios: Our portfolios provide access to both domestic and global equity markets, along with halal asset classes typically reserved for the ultra-wealthy, such as Sukuk and gold.
3. Made for you:  When you complete the sign-up process, we'll guide you through a series of questions. Based on your responses, we recommend a portfolio customized to your financial goals and life stage. We also provide custom portfolios if you prefer more control over asset allocation. With these, you can select your ideal distribution for each asset class.

How to Roll Over Your 401(k) to Wahed IRA

If you're interested in rolling your 401k over to an IRA, below are the steps you can follow to initiate the process:

1. Choose an IRA Provider: Select a financial institution or brokerage that offers IRAs, considering factors such as investment options, fees, and customer service².
2. Open a New IRA: Open either a traditional IRA or a Roth IRA based on your financial strategy².
3. Initiate the Rollover: Contact your former employer’s 401(k) plan administrator to start the rollover process. Opt for a direct rollover to avoid immediate taxes and penalties².
4. Complete the Transfer: Ensure that the funds are transferred directly to your new IRA. If you receive a check, deposit it into your IRA within 60 days to avoid penalties³.
5. Invest Your Funds: Once the rollover is complete, choose investments that align with your retirement goals².

Tax Implications

1. Direct Rollovers: Transferring funds directly from your 401(k) to a traditional IRA is generally tax-free, avoiding immediate tax liabilities and penalties³.
2. Indirect Rollovers: If you receive the funds first and then deposit them into an IRA, you must do so within 60 days. Missing this deadline means the distribution will be subject to taxes and potential penalties³.
3. Roth IRA Considerations: Rolling over a traditional 401(k) to a Roth IRA involves paying taxes on the amount converted since Roth IRAs are funded with after-tax dollars².
4. Early Withdrawal Penalties: By rolling over your 401(k) to an IRA, you avoid the penalties associated with early withdrawals, provided the rollover is completed correctly³.

For more detailed guidance on your specific situation, consulting with a financial advisor or tax professional is recommended.

Ready to Move Your Funds to Wahed? Here's How:

1. Set Up Your Account: Start by setting up your Wahed account.
2. Initiate the Rollover: Contact your former 401k provider to start the rollover process. Each provider has different procedures. Many universal providers allow you to begin this process through online portals to avoid tedious paperwork.
3. Deposit Your Money: Transfer your funds into your new Wahed account.

Keep Your Retirement Fund Halal

Keeping your investments Halal can be challenging since many 401k providers don't prioritize ethical investing. At Wahed, our mission is to deliver the gold standard in halal investing and Riba-free financial options for Muslim investors. We achieve this by providing globally diversified portfolios customized to each client's unique situation and financial objectives. Our rigorous screening process, overseen by our Shar'iah Supervisory Board, ensures that all investments strictly adhere to Shar'iah principles. Rest assured that your investments and returns are Halal.

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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.

*Our team is only able to assist you on rollovers exceeding 20K

Sources: 

1. Russell 3000 Index: Stocks and Limitations (investopedia.com)
2. https://finhabits.com/can-you-transfer-your-old-401k-to-an-ira/
3. https://www.fidelity.com/retirement-ira/401k-rollover-ira