Is Your Retirement Plan Halal?
401(k), SEP-IRA, SIMPLE, and other workplace plans can be halal.
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Is Your Retirement Plan Halal?
Owaiz Dadabhoy: What we’re going to do today is we’re going to have three different guests. We have Monem Salam, who’s Executive Vice President at Saturna Capital, which is the home of the Amana Mutual Funds. And he’s also co-fund manager of the Amana Income Fund and the Amana Developing World Fund. Amjad Quadri, who lives in Chicago, works in Chicago, and covers the area as Regional Manager. He specializes in 401(k)s for nonprofits and for small businesses. And myself, my name is Owaiz Dadabhoy. I’m the Director of Islamic Investing here at Saturna, again, home of the Amana Mutual Funds. I’ve been here since 2008. So, we’re going to talk about in your retirement plan at work. Is it halal? Or does it have things in it that you don’t want? And how can you remedy that? That’s the whole concept of this. So, before we even get started about whether your 401(k) halal, or your 403(b) or 457 or your SEP IRA or Simple IRA... any of those retirement programs from work. We have to understand: what is the importance of retirement itself? So, I’m going to take a couple of minutes here to talk about that. A 401(k) allows you to put money aside, directly from your payroll, and so if you ask people... any of your family or friends, where is your largest pot of money that you have? Almost all of them are going to say, “It’s my 401(k).” Okay? Or my 403(b) or equivalent. And so, what that tells us is that, you know, a periodic commitment-oriented strategy of investing is what is going to help you to get to your financial goal. And so, how much do we need? We’re going to talk about how much we need. Also, there’s a couple of different methods to save in a 401(k). One is to save on taxes now; one is to save on taxes at retirement. And along the way, you’re not paying taxes on any of these accounts. Your company might also offer you a matching program and they might go up to 6% or 7%. It might be as low as 1%, 2%, or 3%. But whatever they’re giving you, that’s an extra amount that’s going into your 401(k). So, financial planners, us at Saturna Capital, we’ll tell you that whatever your pre-retirement income was, you need 70-80% of that when you retire. So, if your final salary... you’re age 65, your final salary was $100,000, you’re going to need $70-80,000 dollars in retirement to be able to make up for the cost. Even if you own your own home, you still have property tax, life insurance, and many different costs that are going to be associated with just living a regular lifestyle, right? Driving your car, gas, food, etc. And health care, which is a larger and larger expense for most of us. There’s three different ways that you can fund your retirement. One is social security. One is your own savings. And one is a pension plan. Unfortunately, most of us don’t have a company-paid pension plan unless you work for a city, county, state, or you work for the government somewhere. You’re a fireman, policeman, policewoman, something like that, then you might have a company-paid pension. So, most of us, our foundation only has 2 pillars in it. And one is social security. And the social security, actually, the average social security check that goes out to 40,000,000 retirees throughout the country is $1,508 a month, which is not going to pay for your rent in most places. And if it does cover your rent, it’s not covering much of anything else. So, how do you survive in retirement? How do you have the retirement of your dream? The way to do it is to save and invest for yourself, starting at an early age and if you’re no longer at an early age, you’re making more money if you’re 40 versus when you’re 20. You can put in more money every year, every month, dollar cost averaging. So, you get the point of why it’s so important to save for ourselves. The safety net of social security is just not enough for most people. So, saving through an employer plan is definitely easy. The convenience of it is amazing. What you find with people that have an individual retirement account, a Roth IRA, or a traditional IRA instead of a 401(k) is that they forget to make contributions. So, they go 2, 3, 4 years without making a contribution. The convenience of a 401(k) is unbelievable and that’s why so many people have a large balance there that they don’t have anywhere else. Deferrals on your taxes and immediate tax benefits if you choose a traditional 401(k) are definitely reasons you should look into it. You’re not paying taxes along the way, whether you buy or sell something. And when you withdraw at the end, if you have a Roth 401(k), you’re not going to pay any tax at that time. If you have a traditional 401(k), you’re just going to pay tax as if it’s normal income at that time. So, how can you save at least a million dollars? If you’re 25 years of age, great news. You can put in $230 a paycheck, starting when you’re 25, and at a 7% assumed rate of return, which is not a guarantee of any kind, you would get to $1.2 million forty years later. That’s remarkable. For putting in... basically you’re putting in $5,500 a year at $230 a payroll. Now, if you wait until you’re 35, you’ve missed ten years. You missed $55,000 worth of contribution. Your end total will be less than half of the person that started at age 25. But again, good news, many of you may have started late. That’s okay. You don’t have to put just $5,500 a year. You can put $19,000 a year into a 401(k) or $19,500. You can also, once you’re 50+ years, you have an additional contribution you can make. I believe it’s $6,000 per year right now, that you can add to your 401(k). So, you can catch up and you can make up for those years that you did not put in money initially. So, the person that started at age 25, you can see on the bottom right there, it says they actually put in $220,000 and their gain is $983,000. It’s a slow, methodical way of contributing and saving for your retirement and so we here at Saturna Capital, Amana Mutual Funds, we don’t say, “get rich quick,” we just say, “save enough through long-term investing.” That’s really the way to get there. So, if you get to a million dollars in retirement, imagine that. Let’s say you’re still receiving a 7% return. You have your allocation roughly the same way. If you pull out 70% per year from that 401(k), your million dollars is going to continue forever, even on your passing, you could leave it as a legacy if it’s an average 7% rate of return. You can pay your zakat from it. You can pay your housing and everything else. Before going into retirement, if you can start to modify your spending. If you can pay off some of your debts. If you can pay off your home loan. If you can pay off your cars. If you do have some loans on it, that would be the best way to do it. In fact, you don’t even have to wait til retirement to do that. You can do that early on and have that advantage of having more money come to your own pocketbook. How do you invest for the future? How do you make the selection? When you’re at work... You know, I started by 401(k) at 19 years of age and my manager forced me to open up the account. And she said, “You know, just choose whichever funds you want.” And I said, “Well, how do I choose? What’s the methodology?” So, if you had stocks from 1928, and this particular chart goes to 2013, but this rings true all the way to today. You have a 9.6% average annual return, even though you’ve gone through the Great Depression, 9/11, the tech bubble, the Great Recession of 2008, and even COVID earlier this year, the average is 9.6% per year. Just to put that in perspective, a 7.2% return would double your money every ten years. So, let’s say at age 50, you have a million dollars, and if you save that at 7.2% rate of return, by the time you turn 60, you’re going to have $2 million. And if you have a greater return than that, you’re going to have just... multiply that even further. Bonds, during this period of time, about 5% and cash 3.5%. As you know, we’re not in an environment right now where even cash is giving you that much. And cash and bonds deal with riba, or interest, usury, so most people want to avoid that. How can you avoid that? How can you have a nice allocation? You can go to our website, amanafunds.com, and you can click on the Fund Selector. Amana Fund Selector. So, it’ll ask you, I think six to eight questions. I can’t remember exactly right now. And it takes maybe 5 minutes to complete. At the end of it, it will send you a, right then and there, it will send you a PDF that says, “This is what you could invest in.” So, it’ll say, 25% in Amana Income, 25% Amana Growth, 50% Participation Fund, which is the equivalent, if you want to call it, of a bond fund. It’s not debt-backed, it’s asset-backed. Developing World Fund will have an allocation as well. So, you can use this for money that you invest with us directly or, if you’re buying our funds through your 401(k)... if you have that advantage right now, you can go to our website and figure out what percentage you should have, because there is, you know, ramifications of what you choose. So, obviously we want you to invest with caution. If you go to our website, again, you can get a prospectus, our annual report, and so much more. Fund fact sheets, information about IRAs and HSA accounts and Hajj accounts and so forth. You know, all four of our funds are based on Islamic principles, so they’re what we call halal funds or Shariah-compliant. The Income Fund, started in 1986, 34 years ago, and it’s all dividend-paying stocks that are within there. The Growth Fund, growth-oriented companies, all stocks. Developing World Fund is in the emerging markets and the Participation Fund invests in sukuk, so it’s the only fund that does not invest in stocks. If you have questions for us, we’re going to show the slide at the end with all of our contact information so you can just take a snapshot of that and send us an email or give us a call. So, with that, I’m going to ask the question now of Monem: if somebody comes to us and opens up an IRA account directly, they’re going to be able to buy the Amana Mutual Funds and it’s not going to be an issue, but an IRA account, you can put $6,000 into it, maybe a little bit more if you’re over 50. If you want the advantage of putting the money directly into your 401(k), into your retirement account through your employer, there’s a great advantage, right? Because you don’t have to remember to put the money in. It’s coming out directly and they may do matching as well. But how does somebody get the advantage of having the Amana Mutual Funds within their 401(k) at a large company?
Monem Salam: Thank you very much, Owaiz, and thank you very much everyone for joining. Salam Alaikum. So, that’s a really good question. Kinda going back a little bit, I think the overall theme that you want to be able to think about is the fact that the more choices you have, the more opportunity you have to make something halal. So, even in your 401(k) when your employer comes up to you and they give you a piece of paper or they say, “Go to the website,” and you look at the website, there’s going to be multiple different options that you have. And generally speaking, in order to be able to have a diversified portfolio, they’re going to have a section on international funds, growth funds, income funds, bonds, and then cash. Those are usually the ones that are there. But, typically what happens also, is that more and more employers are beginning to do this, especially the larger ones, is they’re going to have an option called a brokerage option within the 401(k). And different companies have different names for them, but they’re all usually available. Sometimes, it’s actually not on the plan menu and so what you have to do is you have to call your HR or talk to your manager and say, “Do you offer a brokerage option within this 401(k)? that you have?” And so, again, they try not to make it easy for you because they obviously want you to invest the funds that are already on the menu, but it is possible to do. Once you actually call them, what’s going to happen is they’re going to make you fill out forms for a brokerage account and then, once you have that brokerage account, then the entire universe of the funds, market, whatever, becomes available to you. And because now you can choose to make your investment halal, you can choose to be able to purchase the Amana Funds and you can choose to purchase individual stocks if you wanted to. All of those different types of things. Now, there are some restrictions, right? Some companies, they’ll say, “You know what? You need to maintain a minimum balance of $500 in our plan menu in the plan funds. And the rest you can put into brokerage.” Other ones also will have a restriction that only 50% of your money would be able to go in there. But at least you’re getting some kind of a benefit by being able to do the brokerage account. And the idea here is you’re going to be putting money in, the company is going to be matching you, and then you’ll be able to do it within the brokerage, which is going to be halal for you.
Owaiz Dadabhoy: So, if somebody opens up a brokerage account or a... what’s another word for that... Self...
Monem Salam: Self-directed.
Owaiz Dadabhoy: Self-directed option, right? So, you have those two options. If that happens, is it still within the 401(k)? Does it operate in the same way?
Monem Salam: Absolutely, so basically, it’s an umbrella. Think of a 401(k) as an umbrella account. So, then what you’re going to do is open up a sub-account within that that’s going to allow you to do the brokerage. And so, there are some forms that might be involved but it’s going to be within the 401(k) so you still get the company match. You still get to do the tax deferral on the money that you put in. So, it’s a great form for you to be able to invest.
Owaiz Dadabhoy: Um, does it cost the employer a lot more money to open this option up? Because you know, I’ve had people come to me and say, “What is the reason my employer doesn’t offer this to me? Are they going to be upset if I ask them?” What are your thoughts on that?
Monem Salam: I mean, I think cost is one aspect of it, but I think the bigger part of it, from an employer perspective, is the liability. And that is that because you are able to buy anything in the market, the liability part of it is that just supposing you go out there and you buy something that goes down in value a lot. Maybe it goes bankrupt, right? Now you’ve lost the money. You could technically go back to the employer and say, “Hey man, you allowed me to put the money in and I lost all of it.” And so, that’s what they’re afraid of. And so they don’t try to make it openly something that they’ll tell everybody about but it is something that’s there and you do have to call your HR and find out about that.
Owaiz Dadabhoy: Okay. Now, in some cases, some of the large tech firms... we won’t mention them here... but we visited many of them in Silicon Valley and different places. They have Muslim employee groups and they’ve decided to come together and go to HR and ask their HR to start up this brokerage account, right? So, is that something that people can do? Because what you’re mentioning here is somebody that has a 401(k) that might already have a brokerage option available. What if they go to HR and their HR department says, “Well, we don’t have a brokerage option, so you don’t have that option.” What would you do in that case?
Monem Salam: Yeah, I mean that’s... luckily, we’ve been, both you and I Owaiz, have been around long enough in the industry to be able to help a lot of these companies create these brokerage options. So, definitely, you know, it is going to be demand-driven and so, you know, a lot of times what the Muslim groups did is they actually approached their HR and said, “Look, we don’t have an option to be able to make an investment because none of these choices are halal and so we want you to open up a brokerage account so that we can do that.” Now, there’s two ways to do that. Let me back up a little bit. One is to be able to get a halal fund onto the plan menu. The second way to do that is to be able to open up the brokerage. Now, we would actually, for us, you know, it’s six of one, half-dozen of another. If you can get one of the Amana Funds onto your menu platform, great. That makes life a lot easier for everybody that’s participating in the plan. And you’ll find that many times, our funds do very well. But if, and most likely, they’re not going to allow that, because they have their own committee that decides these things and those type of things, then you go to them and say, “Look, give the options to the employees because there is no option available for us to make it halal.” Now, that being said, if you only have a Muslim group going in there, you know, it’s good but it might not be enough. So, what you might want to do is you might want to talk to the Christian group and say, “Hey would you like to have a faith-based fund in there?” or “Would you like to have options from the brokerage?” And then another option would be to talk to the environmental group and say, “Hey, none of your funds are environmentally-friendly. Wouldn’t you want to have a brokerage option that would allow you to buy funds that are environmental?” So, try and make coalitions within the different groups of your organization so that you can approach HR from a larger perspective of hey, it’s not only Muslims that are asking but it’s a lot of people that are actually asking for this. Now, if your company is small and you know the owner, then yeah you can go up to the owner and say, “Look, please allow one of the halal funds, the Amana Funds, into the plan menu,” and they’ll be a lot more willing to do that because there’s a close relationship whereas in a larger company that might not happen.
Owaiz Dadabhoy: And we are getting questions in the chat group and I’m going to take those into consideration. I’m going to stay on Monem here for a second. There’s something called discrimination testing on a 401(k). I used to work at a large company before and at the end of the year if you put in the maximum or near the maximum, often times you would get a check written back to you that would come back because not enough people participated in the plan. So, have you ever heard of Muslims not participating in a 401(k) because they don’t offer halal options, and would that be a selling point to the company as well?
Monem Salam: Absolutely, and I think especially when you’re a smaller company, that becomes much more prevalent in the fact that if you have 2 or 3 people that are not wanting to put money in because the investment that you’re making isn’t halal, it gives more of an impetus to the owners to be able to say, if I want to save money to maximize my investment then I better allow other options that are available for some of the employees. Now, it worse comes to worst and you don’t have a brokerage option and, you know, they won’t add it to the plan menu, right? All hope is not lost because there are other plans that are available—individual, not the company—that you can take advantage of. For example, a traditional IRA or a Roth IRA, right? Both of those allow you to put away $6,000. What that allows you to do, $6,000 for yourself and $6,000 for your spouse so at least you get to do the $12,000. Now, unfortunately, if you do have a company match, they’re not going to match you in the IRA, right? So, that’s kind of the disadvantage of the IRA. But if you are focused on the halal then you’re better off in doing the IRA.
Owaiz Dadabhoy: Okay, good answer there. So, one of the questions is, “If you do have a brokerage account within your 401(k), can you automate it?” And so, like, for example, every paycheck you have $500 going into your 401(k), now it’s going into the brokerage account. Can you have it automatically go to the brokerage account? My understanding is some plans can do that. Most of them do that. And then, what you can also do is let them know that you want to buy these funds each time, so it’s like, auto-purchasing. Have you found the same thing?
Monem Salam: I have, but it really is company specific. So, definitely when you’re filling out the brokerage account or talking to them, definitely ask them that question. It might be something that they don’t allow and, in that case, maybe every month or twice a month depending on your pay periods, you will need to go in there and kind of do the allocation that’s actually there. Now remember, it’s important to do that because if the money goes into the brokerage and you don’t do anything with it, it will sit in the money market account which is also not allowed because it’s earning interest, so it’s important for you to stay on top of that and make it a reminder in your Outlook or whatever calendar you use to be able to go in every pay period and be able to allocate those funds.
Owaiz Dadabhoy: So even though this takes time and you’re saying the money is going to sit there in a money market account and there’s steps you’d have to take, it’s not automated in some cases, it is totally worth it and I gave you the example of someone that starts at age 25 and goes until 65 and ends up with $1.2 million. There’s a lot at stake here. There’s a reason why we really should take this seriously, even though it’s going to make you take a little bit more time every month. But you can make a calendar entry and every month, you’re going to take 20 minutes to go handle your 401(k) if it’s not an automated system. And you know, as you get more comfortable and you start talking to other people at work, you can also go talk to your employer and say, “Look, we’ve been doing it this way. You could make it a lot easier for us.” Employers really do want to help you. So, Amjad I want to ask you a question, you know, somebody brought up TSP because a lot of folks work in the Federal Government and that’s basically a 401(k) for government employees. What they have is access to a C fund and a G fund and an I Fund. I know people that have worked there in the past as well. It’s basically like government bonds or stocks or international stocks so if someone is looking at, you know, and think about me as a 19-year-old and think about our questioner asking about the TSP funds. If I’m looking at a fund and it says growth fund or income fund, what’s so wrong with that? Why do I need to consider something else?
Amjad Quadri: So, it’s interesting you ask that, and before I jump into that question, just on the automated one, every time I’ve worked with clients, there’s usually a way to automate it. So, I just want to encourage everyone to try it, don’t be worried about trying to have to do it monthly. The majority of the time I walk clients through it, they can automate the whole thing. One of our questions in the chat was for Fidelity—they are the most familiar with us and when we do a 3-way with our clients, they’re like, “Let me guess, you want to do the Amana Funds.” And usually that ends up being true. Fidelity is just very used to getting calls from Muslim clients that want the Amana Funds. So, for anyone that’s out there trying to do that, just know that it’s been done and it’s easy and now they’re getting very familiar with us. To go back to the question about the TSPs, so what we’re looking at... and this applies to everyone, actually, even if you have Fidelity and you just have some, you know, target-dated funds or something else and you’re looking at those and you think hey, international looks like it would be halal... what happens is a lot of times, you now, for diversification or for other reasons, they will inevitably have alcohol and some financial institutions within those funds because that’s part of what makes up the international fund or it’s part of what makes up an S&P fund. So, that’s the reason why it’s best for us to look further into them and to find a way to get one of the Islamic funds on there.
Owaiz Dadabhoy: Okay. So, what is a target date fund... why is that not going to be halal for you? Besides the stock portion. What else is going on in there?
Amjad Quadri: In the target dated funds, usually there’s a lot of bonds because it’s target dated. And the one other downfall with target dated, and what we have on our website that will hopefully help a lot of you with this, is we have what’s called the Amana Fund Selector. And it kind of asks you questions based on your age, your investment knowledge, where you really fit.
Owaiz Dadabhoy: Okay. So, Monem had mentioned about how you could have a brokerage option and you could buy whatever you want in there once you have the brokerage account open. You can buy Amana Funds or whatever stocks you want. Be careful about buying individual stocks because if you have one sector that you’re investing in and that sector goes down, your entire portfolio is at stake, so it’s good to have diversification and good asset allocation. But, you know, some small companies, you could have a company with, I’m thinking about one with twenty attorneys and one of the attorneys decides, “Hey you know what? I learned about the Amana Funds. I need this as part of my retirement.” What can they do that’s different than opening up a brokerage account? This is mostly pertaining to small companies.
Amjad Quadri: Absolutely. You know, this example actually came up with a group of small partners at a physician clinic. And one of the partners was Muslim who wanted the Amana Funds and he had them personally in his IRAs or something else previously. And you know, I mentioned to him that, you know, one of the ways, because you’re a smaller company is they can add the Funds directly as one of the fund menus, but the other thing that I mentioned to him is that if you’re one of the partners and as a small company you’re always looking to save money where you can, one of the things that we can offer you is to host the 401(k) completely for your company. And what that will give you is you can keep the funds that you have on there. But you can add the Amana Funds as well, and the advantage of that is our cost for hosting the 401(k) is one of the lowest costs in the industry. We come out to about $750 for the year for our whole package. It gives them the ability to be very competitive, continue to have the other funds that the partners want, but also have the Amana Funds and then the partners are happy because they’re able... one of the expenses on their bottom line, they’re able to reduce that a little bit.
Monem Salam: Can I just jump in?
Owaiz Dadabhoy: Mhm.
Monem Salam: You reminded me with the lawyer situation of two kind of examples that I wanted to give you. And that is, there was a law firm out of Houston that one of the employees, you know, wanted to have the Amana Funds in there, so she went to her HR and said, “Look, I don’t have a Muslim option, an Islamic option, can you please add the funds?” So, they eventually did add the funds to the plan menu, and not only did they do that, but they actually dropped some of the other funds because ours were actually doing better than the other funds that they had. So that’s even at a small company, but we have, and I can’t name any, but we have had larger companies that have actually included our funds in their plan menu not because of the angle for an Islamic fund but just because we were doing so well. The returns for whatever their criteria were for choosing funds, we showed up on there and they chose us to add to the menu. So, it’s always possible comparing the Funds, we do score sometimes very well.
Owaiz Dadabhoy: Okay. That’s really good information. I remember that story in Houston as well. And the other thing about that is it was a lot of money going into it. More than what one person could put into it. So other people realized the value of this particular fund that they had added into the lineup. So again, you can have a brokerage account, or you can ask, if it’s a small employer... there’s no way a large employer is going to put Amana Mutual Funds in their lineup because everyone wants to be in that lineup, right? If it’s a Fidelity lineup, you’re not going to add Amana Mutual Funds on the lineup itself, you’re going to have to go to the brokerage account. So, the question from one of the folks in the chat group is: who should you go to? Should you go to HR at the company you work at? Or should you go to the company that’s managing the 401(k) to add the brokerage?
Monem Salam: So, that’s a great question. So, I wanted to mention this, that we have a couple of advocates or ambassadors that are out there and one time, not too long ago, I want to shout out without giving their name. He’s been to four different companies and in all four different companies, he’s advocated to add the brokerage so that he could buy the Amana Funds. So, you would actually have to go to HR first because the decision is made at the company level. Once it’s made at the company level, then whatever the provider is can actually add the brokerage in there. Both myself, Amjad, Owaiz, we can walk you through the process. You don’t have to do it alone. You have all of our contact information so if you are interested in doing that, we can help you, maybe even draft a letter to send to HR initially. There’s also an email that you can send out to other employees to say hey, I’m trying to do this, can you please help me in doing this. All of these things, we’ve kinda... not perfected it, but we have a methodology of how to do it, so I would encourage you to email one of us and we’ll be happy to help you to add the brokerage option within your 401(k).
Owaiz Dadabhoy: Okay. Great. Good. A quick question for you, here. I was looking up some statistics and I found one from the Bureau of Labor Statistics from 2017 that said that the average person, after when they started work at age 18 up until 48, has had 11.7 jobs. Now... that’s not my experience. My experience is I work in a small place for 4 months or so, working weekends, and then I had two jobs: 19 years and now 12 years here. So, it doesn’t work for everyone but for some people, they’re working 12 jobs by the time they turn 48. So, what happens with all of those 401(k)s? What do we do with those, Amjad?
Amjad Quadri: So, what we encourage a lot of people to do is there’s several reasons, but we encourage them to move them into traditional IRAs and you can move all of them and keep them in one place so you’re not thinking, “Hey, what happened with this 401(k)? Where is it invested?” And when I get calls from people that either want to move over their old 401(k)s or if they want to, um, just put everything together. A lot of times they don’t know what their money is invested in at the companies that they used to be at. So, to make that easy, you can put it all into one place, in a traditional IRA with us. And depending on where you’re at currently, you can continue to actually fund the traditional IRA at $6,000 a year and continue to add to it, as well. That way, you continue to grow your retirement funds.
Owaiz Dadabhoy: Okay, so going back to rollovers, right? So, you have something sitting around. There’s $3,000 in it. Something you had twenty years ago that you didn’t have much money in. And you have another one at $75,000. Then you have one at $15,000. You can actually consolidate all of those into one company. Now, the benefit of that is so your family knows where to find them. I remember talking to an Imam one time. He said, “I had an old 401(k).” I said, “How long ago was it?” He said, “I left the company 15 years ago.” I said, “Do you know where’s at?” He said that, “I think the company has changed so often I don’t get a statement anymore and I don’t know which company it is.” So, it took him I think a year or two before he could find the 401(k). I gave him some ideas for how he might be able to do that. So, you know, put it all in one place. You know it’s Shariah-compliant. You have people to talk to that can assist you, as well. These are all good reasons to try and consolidate and make your life a little bit easier. Monem, this year there was the CARES Act that came out and the CARES Act had a few new, like, nice benefits for people, you know, taxpayers in America. So, one of them was about the required minimum distribution. I’m not sure how many people are affected that are on the call today, but if you could briefly talk about what changes have occurred there.
Monem Salam: Sure. Thank you. So, generally, in industry parlance, it’s called RMD, which is required minimum distribution. And what that says is that if you have a traditional IRA or a traditional 401(k), which is the tax deferral part, not the Roth 401(k). An IRA actually requires you to take money out of your account when you turn a certain age. Now, before the CARES Act, that age was 70 and a half. So, for example. You’re working. You’re putting money in throughout the years. You turn 70 and a half and the IRS is going to make you take money out of the account and there’s a formula that every year they come up with. Basically, it’s based on the average person’s life expectancy for that year. What the CARES Act did was it actually extended it from 70 and a half to 72 and a half. And it gives you 2 more years of being able to save a little bit more and also being able to put some more in there before you begin to take the money out. You know, a lot of people that I know of, and they’re true to their word, said you know what? I’m not going to retire; I’m just going to work for the rest of my life. I know people who are 75 and still working almost full time, maybe part time. Those type of things. The RMD that they get, they might not even need. And so, one of the things that you can do to be able to take advantage of taxes and those type of things is an RMD allows you, or any withdrawal from an IRA, you can directly have that withdrawal given to a charity. When you do that, there’s actually no tax consequences for it, and your AGI doesn’t go up and down based on the money that you take out. And you can only do that up to $100,000, but for most people, that’s a pretty significant amount. It benefits a charity. It benefits you from saving taxes. It benefits you from giving Sadaqah. There are a lot of benefits from being able to do that.
Owaiz Dadabhoy: We had a question about is the 403(b) different than the 401(k). So, it reminded me of another question. Basically, you have any type of retirement program that’s somebody is providing your company. This all applies to that. So, whether it’s a 401(k), a 403(b), etc. I’ll give you a quick example. The state of New Jersey, for their colleges and universities, they have thousands of employees there. They have six different 401(k). You thought your job was difficult of choosing which investments to choose. Before you even choose your investments, you have to choose which company you want. So, there are six different companies and once you choose that company, then you can select which funds you want to purchase. So, one of the six companies is Voya, in New Jersey. So, if anyone here is from New Jersey, you can spread the word. The Voya plan added the Amana Mutual Funds. So, if you have that one, you can go in and purchase the Amana Mutual Funds through Voya and that’s the only one that you do that with. So, Monem, there’s the 401(k), the 403(b), the 457, the Simple, the SEP, all of these, what we’re saying today pretty much covers a lot of this. But what if somebody, because we’ve had some experience with this, somebody comes to you and says, “My employer had some type of benefit for me. I’m retiring. There’s $120,000 or $150,000 or more or less. I have options and I can have a monthly amount. I can do something else.” What would you say to somebody like that? What is something they should look at there?
Monem Salam: Thanks for the question. I think that what you need to look at is, first of all, what they’re going to be doing is they’re going to be giving you one of maybe two choices, right? Number one is they’re going to be saying you can take it as a lump sum. Meaning take the entire money and they give it to you. Now, you can make that tax-efficient and put it into a rollover IRA as Amjad was talking about. The other option they’ll give you is we can keep the money but on a monthly basis we’ll just give you a salary, basically, a pension, every month, for that. Generally speaking, from a financial perspective, I usually recommend taking the lump sum. There’s a lot of advantages to that. Again, since we’re talking about this on the seminar, again, you can control your investments and you can choose to make them halal. So, that’s one part of it. The second part of it is that, you know, and this has happened, is that a lot of companies have pensions that are underfunded. And what an underfunded pension means is that the pensions’ liabilities, what they owe to their employees or their retired employees, is actually more than the money that they have in the actual fund itself. So, you get into a situation that is a company eventually goes bankrupt, the industry gets hit. If you’re an airline, manufacturing, something along those lines. When the company declares bankruptcy, the pension gets wiped out. Okay? It either gets wiped out from that perspective, so you don’t get any money, or if that pension had a lot of their own company stock in there, which sometimes they actually do, and if you’re going bankrupt, that means you’re wiping out the shareholders so stock is going to be worth zero. So, although it would be great let’s say, you know what? I work for a large conglomerate and they’re never going to go under... be careful because a lot of the companies that we thought could never happen... they don’t have to go under. They just have to declare bankruptcy in a reorg, and you could end up potentially losing it. So, always better in our opinion to choose the lump sum into a rollover IRA and the number one reason to do that is you get the choice of where you make your investments and you can make your investments halal.
Owaiz Dadabhoy: Okay. Thank you very much, Monem. We have just a couple of minutes left. Amjad, a question for you. So, if someone has had an old 401(k) or excuse me, IRA at their bank. Right? So, they may have a bank IRA or an investment IRA through their bank. If they have that, what can they do, what’s the process, to be able to transfer that over? That’s the question.
Amjad Quadri: So, very similar to the rollover of a 401(k), what I encourage people to do is open a similar IRA with us. And you can do that online, and then you can just log into your old institution and have them do a qualified rollover and if you already own the Amana Funds, then we can do it where you don’t even have to sell them. We can just transfer that over and take over custodianship of it. So, depending on what it is. If you have other funds, then we’ll just do a qualified rollover and there’s no tax involved, and you’d have a similar account set up with us.
Owaiz Dadabhoy: Thanks for answering that. Thank you for everyone for asking your questions. Amjad has provided his information as the latest chat message there. Monem is at [email protected]. I’m at [email protected]. So, give us a call or email us if you have questions or you can just go to our website and get more information from there. The way that we operate is we just like to provide the education and the information and let you make the best decisions for yourself. We’re here to help you. Think about all of our financial plans, not just retirement. You’ve got college and you’ve got maybe you want to go to Hajj when that is opened up again. You might want to buy a small business. You’ve got to start to think about what the plans are and then start investing in a way that helps you to do it in a methodical way but also in a tax-beneficial way. So, on future presentations we will talk about such things. I think one of the next ones we’ll be talking about the donor advised fund. We thank you for being on this one. Spread the word that there is something called investing according to Islamic principles and let us know if you ever need any assistance. We really appreciate you being on.
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