401K Plan

The following question and answer by Sheikh Yusuf Talal DeLorenzo attendees of the Dow Jones University Courses on Islamic Investement.Question:: My question is about taking a loan against my vested account balance. I've been told that any money borrowed must be repaid with interest. Essentially, I must repay myself with interest. I've made the argument with the plan administrators that since the account does not accumulate at some pre-determined fixed rate of interest (there is both chance of gain and loss) why should I be compelled to repay my loan with interest. They think that I should be glad to repay myself with interest and thereby protect myself from adverse market conditions, etc. I've explained my position with regards to Islam and they have still refused to honor my request for an interest free loan. What advice can you offer me? I could really use the loan to repair a house that I purchased interest-free.Answer: The situation you describe is an interesting one as it gives rises to a number of important issues. My first reaction to your question was to direct you to seek the advice of a financial planner. But, in fact, your case is one which may be significant for many Muslims in similar situations. 401K funds are structured rigidly and the rules which regulate them are strict. The rules in regard to what you suggest demand that you pay yourself a market-based interest rate on whatever you borrow. The reason that your company officials appear unwilling to work with you on the matter is that they are unwilling to break those rules; and they can hardly be faulted for that. Even so, the issue at stake here is one that impacts a growing segment of the working population here in the US and, ideally, Muslims should be allowed to loan themselves money from their own 401k accounts without interest. Obviously, before that can happen the laws regulating the 401k funds will have to be changed. One way that this can happen is by means of what is known as a Private Letter Ruling. This would have to come from the Internal Revenue Service; and if it were issued, it could be cited by other Muslims as a legal precedent. What I will suggest is that you put your request in writing to your company's plan administrators. Then, when they make their reply to you in writing, you may take the two letters (your request and their reply) and include these in a letter to the Department of Labor (which is in charge of 401kplans). In your letter to the Dept. of Labor, you will need to explain what you want,why you want it, and why you think that it is important for the Dept. of Labor to takeaction on the matter. Don't expect the issue to be resolved anytime soon, though. Thesethings take time. You may even have to seek legal counsel. But the case is such that youmay be able to find a Muslim civil rights group willing to support your effort, or to findyou pro bono legal representation. Ultimately, the case will have to go the IRS. I havediscussed this with a professional, and he believes the case has merit. And it is Allahwho prospers and assists.

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