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Zakat on Retirement Accounts

Question: Do Muslims have to pay zakāt on retirement accounts like 401(k)s and IRAs?

Summarized answer: Zakāt on retirement funds is an annual obligation due on the withdrawable amount – meaning the amount one would possess if they were to liquidate the account and pay any penalties and taxes.

Detailed answer:

All praise is due to Allāh ﷻ, and may peace and salutations be upon the Prophet ﷺ.

Zakāt is of the most fundamental obligations of Islām, and it is frequently mentioned alongside the ṣalāt (prayer) as the defining characteristic of a Muslim. Hence, it is important to balance the individual’s rights and need for financial safety alongside the rights of the poor and the zakāt due to them. It should also be kept in mind that one of the goals of the Sharīʿah is that wealth is not stagnantly retained amongst the wealthy (see Sūrah Ḥashr: 7).

The question of zakāt on retirement funds has generated much discussion within scholarly communities around the world, and the Fiqh Council of North America itself has spent a number of years examining and discussing various opinions. In looking at this issue, the Council took into account the prevailing circumstances of most Muslims living in North America. It should be noted that many fatwās that emanate from other lands take into account factors that are typically not present in America (such as the fact that retirement funds in some countries are government controlled and mandatory, and are also completely inaccessible until retirement age).

Given all of the above, the Fiqh Council has concluded that zakāt on retirement funds is an annual obligation due on the withdrawable amount – meaning the amount one would possess after liquidating the account and paying any penalties and taxes – regardless of whether the retirement fund is self-financed (such as an IRA or similar) or company-sponsored (such as a 401(k) or similar). The matching amount gifted by the employer in the latter cases belongs to the owner of the fund, hence it is considered a part of his wealth as long as it is vested.

Zakāt is due on retirement funds for the following reasons:

  • All retirement funds in America are voluntary, and no one is forced into contributing.
  • The funds are stored in a named account belonging to the owner.
  • In some circumstances, the funds are accessible to the owner in the short term without penalty (through loans and/or direct withdrawals).
  • In all circumstances, if the owner requires it, the funds are accessible before maturation with a penalty.
  • The funds are eventually accessible entirely.
  • In case of one’s death, the inheritors will inherit the amount of the fund after penalties and taxes.

These reasons demonstrate that one has full ownership (milkiyyah tāmmah) of their retirement fund, which is the Sharʿī requirement for zakāt. The fact that there might be penalties or taxes in case of early withdrawal, or that an investor doesn’t fully control where the money is invested, does not negate that ultimate ownership does indeed belong to the individual. Since zakāt is due annually on wealth that one owns, the retirement fund shall be treated as a zakātable asset. However, since the full amount is typically not withdrawable, any penalties or taxes that would be due on the paper amount may be deducted the day that the zakāt is calculated, and this final amount should then be added to one’s other zakātable assets (such as liquid assets held for a year). If the niṣāb value is met, zakāt should be calculated and paid. The amount of zakāt due will be based on the type of asset — for example, if the 401(k) or IRA account consists of stocks, then calculations for zakāt on stocks should be used.

With careful financial planning, a person should have sufficient funds available outside their 401(k) or IRA accounts such that they do not need to be liquidate anything in their retirement account (and incur penalties) in order to pay zakāt. If sufficient funds are not available, a concession can be made: given that these funds are typically locked in with penalties, and the amounts become successively larger year by year, in case one does not have liquid assets to pay the full zakāt amount in any year, one should pay as much as one can for that year, and the remaining amount should be recorded and will remain a debt that is owed to Allāh ﷻ, and may be delayed and paid at the time when such funds are available or until the retirement fund is actually cashed. This ‘debt’ can be accrued and added up without penalty for as many years as one is unable to pay zakāt on the retirement fund; of course, if one is capable of paying this amount earlier, then it is obligatory to do so.

And Allāh ﷻ knows best.

Prepared by Dr. Yasir Qadhi and Sh. Umer Khan, approved by the Fiqh Council of North America

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