Assalamualaikum Warahmatullah
I make contributions to my 401K plan every month and whatever I chip in, my employer matches that amount. Typically if someone takes the money out of their 401K before they reach the age of 59.5, they will have to pay a 10% early withdrawal penalty in addition to the tax which is paid to the government. If someone takes out a loan from that money then they have to pay back it back to the firm with interest in typically 5 years period.
Since interest is haram in Islam, what should I do if I need to donate to a charity using my 401K money?
Any help would be much appreciated.
JazakAllah
الجواب وباللہ التوفیق
We are unaware of all the details regarding your 401K account and the reasoning and reality behind you and your employer depositing money in this account. In addition, we are unaware of the areas where your firm invests or the manner in which that money is used by them. However, from one of the points mentioned in your question it is clear that just like “Fix Deposit” accounts in the banks, there is an issue here as well which is impermissible from a Shar‘ai standpoint. Therefore, we recommend you provide further details and ask a question regarding its permissibility or impermissibility.
As far as donating from that account is concerned, if you have any other money from which you can donate, that will be considered preferable. If you do not have any other spare money, then paying through that account implies that you will have to pay interest or the amount of tax which may become unbearable for you. Thereofer, our recommendation is for you to delay your donation at this point and pay it at another suitable time so that you are not involved in any interest based or non-Islamic transaction. Or if you want to pay the donation by taking a loan from someone who you can pay back with ease in future, then that is also an option.
فقط واللہ اعلم بالصواب