Is a Roth IRA halal? Which principles am I expected to follow as far as halal investing goes? Should I simply invest in the same assets that are allowed by the government, provided that they are halal? Well, you are about to find out about this and more in today’s comprehensive article, so hang in there to find out more about what you should be doing as a Muslim investor, as far as Roth IRAs are concerned.
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With that being said, let´s continue with the article on ROth IRAs and if they are Halal!
Approaching retirement investing and savings according to Islamic principles offers the promise of success to Muslim and Non-Muslim investors. Generally, Halal investing encourages the adoption of a disciplined investment process that calls for the in-depth scrutiny of not only the assets involved but also of the companies involved. The common factor that is considered when it comes to such investments is low debt requirements, which in one way or another facilitate a risk-averse approach to investment.
Another interesting perspective of halal investing is the discouragement of short-term speculation. Islamic scholars have actually dubbed all frequent trading activities with high turnover rates as gambling, which is prohibited according to Islam laws. The reasoning behind this is that low turnover significantly reduces trading expenses as it also increases tax efficiencies.
To many conservative investors, the concept of halal investing may make a lot of sense, but there are also some downsides worth considering. The fact that the investments are screened to ensure that they are all halal means that a great number of non-conservative assets do not find their place in a conservative investor’s portfolio.
Restricting the investment choices to a smaller variety, unfortunately, implies that the portfolios may not be as diversified as other investors’ portfolios, which then increases the loss-making potential. If for instance, the global economy is taking a hit from all angles, it is hard for a halal investor not to book significant losses on all fronts. The good thing, however, is that when things are doing great in the global economy, the halal investor can make impressive gains.
Halal investment screening
Halal investment screens are adopted to help with the assessment of whether a certain firm’s business activities are halal or haram (legal or illegal). The screening process ensures that all the haram investments do not make it to the investor’s portfolio. Halal investment screening eliminates investments that fall into any of the following categories below:
- Bonds and all investments that are interest-based.
- Stocks offered by companies that have high debt ( they are also referred to as highly leveraged firms).
- Securities of firms that offer their products and services in industries that are prohibited by Islamic principles such as gambling, pornography, pork selling, insurance, interest-based lending, etc.
In addition to the above screening categories, there are some Islam-based investment firms that apply other regulations. You may find that you will not be allowed to invest in companies that have:
- More than 5% of their revenues come from sources that have been declared haram. This is referred to as the 5% rule.
- Over 33% total debt in comparison to the market capitalization. This is based on a trailing 12-month average.
- An excess of 45% accounts receivable in comparison to the firm’s total assets, based on the trailing 12-month average.
Any company that does not pass this screening process is perceived as haram, and Muslim investors are discouraged from investing in them.
Is a Roth IRA halal?
Technically, yes. This is, however, highly dependent on whether the assets in your IRA meet the requirements as far as halal investment screening goes. This means that one investor can have a halal Roth IRA, and the other a haram Roth IRA, depending on the type of assets they include in their portfolios.
For the purpose of clarification, a Roth IRA is an individual retirement account that allows you to invest your after-tax funds. Upon investing the after-tax funds, you will not be required to pay taxes when the time to take withdrawals comes.
Traditionally, Roth IRAs allow investors to use their money to invest in:
- Exchange-traded Funds
- Mutual funds
Due to the nature of the above types of investments, it is highly likely for an investor to end up with haram assets in their portfolio, without their knowledge or approval.
This, therefore, demands that the investor takes their time to scrutinize all the investment opportunities that come their way under the Roth IRA blanket. It would be unwise to steer clear from all types of retirement investment plans simply because there is a likelihood that you will end up with a bunch of haram investments. Failing to save and invest for your retirement will, in fact, lead to a lot more trouble and will only see to it that you have a miserable final stage of your life. I know you want to enjoy your golden years, which is why in the next stage, we shall look at what you can do about this matter.
Solutions – How to go about halal Roth IRA investing
The one thing you can do if you want to use the Roth IRA structure to invest for your retirement years is to open a self-directed version. Self-directed IRA versions allow Muslims to gain control over their retirement accounts so that they can stay away from any haram investments ( investments that are linked to companies that are in the prohibited industries, or in the interest-yielding investments).
Through a well-structured retirement plan, Muslim investors can put their money into assets such as real estate or any others that are accepted by Sharia law.
Frequently Asked Questions on “Is a Roth IRA Halal?”
1. How do I know if a Roth IRA is halal?
A Roth IRA is halal for you if it allows you to invest in halal investments, or the approved investments according to the Sharia laws. You should do your research to ascertain that the companies you invest in do not offer their services or sell products in the alcohol, weapons, gambling, pork products, pornography, music, or cinema industries. You should also ascertain that the assets you add to your portfolio are not from interest-based or highly-leveraged businesses.
2. What are the alternatives to bonds for Muslim investors?
If you want to invest in bond-like assets, you can turn to Sukuk investment certificates, which are similar to bonds, with the only difference being that they are not debt-based, hence are halal. All Sukuk investments must meet the following criteria:
- They must comply with Islamic principles
- Risk-sharing (the issuer and investor share the risks as well as the rewards of the enterprise).
- Exposure to enterprise risk (the investors are exposed to business risks, just as they get to enjoy a share of the profits).
- Guarantees ownership of assets (not debt)
3. Are there halal funds (mutual funds)
Yes. You can access halal mutual funds that are offered by Islam-based investment firms, which are oriented towards the provision of halal investment vehicles. The funds are generally structured in a similar manner to the regular funds, but they let you gain exposure to different assets from the ones that are commonly found in the regular mutual funds.
4. How much money can I contribute to my halal Roth IRA?
If you successfully open a halal Roth IRA, then you should stick to the stipulated guidelines on the maximum contribution limits. As of 2022, the IRS allows you to contribute $6000 to your Roth IRA (or $7000 if you are over 50 years), subject to all the terms and conditions. If you already own another retirement plan, you should consult your IRA service provider on the maximum allowable contribution that you can make to all your retirement plans.
More interesting reads for you!
That will be all for today’s article in which we have looked at whether a Roth IRA is halal. I hope that by reading this article, you have gained enough insights to help you find your way and invest as a Muslim (or non-Muslim if you are inspired by the Islamic approaches to investing). If you have any pressing questions about this post, do let me know by dropping them in the comments section- I will get back to you ASAP!
I wish you well,
Eric, Investor and Team Member at Gold Retired!