Question # 361: As Salam Alaikum, Taking loan on 401k is allowed in Islam or its not. This is usually involve in paying a % of interest along with the payment which then get returned to you in your paycheck by the company. So its like you are paying interest to yourself.

bismi-llahi r-raḥmani r-raḥīm,

Assalamu ‘laikum warahmatullahi wabarakatuh,

All praise and thanks are due to Allah (سبحانه و تعالى), and peace and blessings be upon His Messenger (صلى الله عليه و سلم).

Dear questioner,

First of all, we implore Allah (سبحانه و تعالى) to help us serve His cause and render our work for His sake.

Shorter Answer: There is difference of opinion among scholars that borrowing from 401(K) is allowed in Islam or not. Some say it is not a sin as one pays interest back to oneself, which is not an interest in reality. On other hand, some say interest charged is a clear form of riba (usury); the fact that the money goes back to one’s account does not change the ruling. Also Refer to Question # 298: Zakat on 401(k) Retirement Plan

Long Answer: According to the fatawa of Fatwa of Dr. Main Khalid Al-Qudah, Member of the Fatwa Committee of Assembly of Muslim Jurists in America:

  • Borrowing from your 401(K) is not a sin, because as you said, you pay interest to yourself, which is in reality not an interest, while borrowing from a traditional bank is the most explicit example of riba.
  • Borrowing from one’s 401(K) to get his money is not defined as a loan contract from an Islamic perspective, although it looks so outwardly. It is just a legal way to circumvent taxing that amount, as you know. With this in mind, paying the so-called (interest) to withdraw the saving money is allowed.

According to fatwa of Dr. Monzer Kahf: “Borrowing from your own 401K account is permissible because you are borrowing from yourself and you can charge interest to yourself because it means you taking money from one account of yours to another, no more than that… There is an established Fatwa in Islamic banks all over the world to this effect. They use it to avoid taxes or to reduce them when the bank owns several other subsidiaries and manipulate income between them as interest to seek the best tax saving strategy.” In another fatwa, he said: “401K is an account fully owned by you, it is like having two bank accounts in a bank. From Shari’ah point of view, you certainly can withdraw and deposit any amount in any of your two accounts under any name. In other words, Riba doesn’t occur between two financial and legal entities owned fully by the same person, even if the word interest is used for regulatory and/or tax purposes.”

However, according to Shaykh Waleed Basyouni, Member of the Fatwa Committee of Assembly of Muslim Jurists in America:

  • The interest that they charge you is a clear form of riba (usury), which is forbidden in Islam. The fact that the money goes back to your account does not change the ruling.

Allahu A’lam (Allah (سبحانه و تعالى) knows best) and all Perfections belong to Allah, and all mistakes belong to me alone. May Allah (سبحانه و تعالى) forgive me, Ameen.