Zakah of the Retirement Account
Question:
Need your opinion on the following statement on Zakat on 401k Modern scholars differed as to when to pay zakat on retirement accounts such as 401k, IRA’S, and other similar investment vehicles wherein a person does not actively have control over and cannot access without penalty the funds therein until a threshold or time period is met. The more correct of these 2 opinions is that Zakat is not due on your retirement account (401k, IRA, or similar) until it is time to cash out without penalty. • If the conditions of that account state that after a person reaches a certain age (say 55 or older) then he or she may withdraw without penalty then Zakat is paid on that amount when you reach that age. Each subsequent year, if Nisaab still exists in the account, you would pay on that account. • If you cannot access the funds in that account, or you are penalized for early withdrawal, then you are not liable to pay Zakat on that account. o Zakat is only due on unhindered, fully accessible wealth which is actively managed by the investor. o Any wealth which is lost, inaccessible, held in an illiquid state, or cannot be accessed freely without penalty is not liable for Zakat. • If the wealth in the retirement fund is designated for the employee then he must pay 2.5 percent of that amount only when he cashes out without penalty at the time those funds are made available to him. • If he or she chooses to cash out early and pay the penalty then they must still pay Zakat on the amount withdrawn immediately at the time of availability regardless of the matching funds contributed by his employer or not. • If he is not allowed to cash out, but instead is forced to take a loan from the 401k fund and pay it back with interest, then he or she will not pay Zakat on this amount until it remains in possession for one year after receiving it from the 401k fund. • You pay 2.5% on the amount available to you at the time the money is made available to you without penalty. You do not compound 2.5% for the entire tenure of the investment; you only pay 2.5% for one year on the amount made available at cashout without penalty.
Answer:
I first answer your question based on the traditional understandng of zakah before sharing my own view with you:
Theoretically any amount of money may be subjected to Zakah as a ‘product’ or as ‘wealth’. People normally pay part of their salary as pension. Assuming that the person used to pay the Zakah of his salary (which can be the tax that is deducted from it) then no further Zakah is due on the pension money as a ‘product’.
Whenever the person has access to the retirement money (whole of it or part of it, in lump sum or as a regular payment or both, as his own and not as a loan) then if any part of this sum is lying idle on the annual Zakah calculation day of the person, assuming it is above Nisab, it will be zakatable wealth on which 2.5% will be paid out.
I think the above brief explanation covers all the situations that you referred to in your question.
*****
As for my understanidng of zakah:
Zakah is the very tax that you pay to the state and no more zakah is due other than the tax that the state demands. Therefore in the presence of law for taxes, you only need to pay what the state requires as tax. This applies to anything, including retirement account. The only exception is when there is no civil law for taxes. I am not aware of any civilised country at our time that would fall in this category.
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Revised July 2016
Need your opinion on the following statement on Zakat on 401k Modern scholars differed as to when to pay zakat on retirement accounts such as 401k, IRA’S, and other similar investment vehicles wherein a person does not actively have control over and cannot access without penalty the funds therein until a threshold or time period is met. The more correct of these 2 opinions is that Zakat is not due on your retirement account (401k, IRA, or similar) until it is time to cash out without penalty. • If the conditions of that account state that after a person reaches a certain age (say 55 or older) then he or she may withdraw without penalty then Zakat is paid on that amount when you reach that age. Each subsequent year, if Nisaab still exists in the account, you would pay on that account. • If you cannot access the funds in that account, or you are penalized for early withdrawal, then you are not liable to pay Zakat on that account. o Zakat is only due on unhindered, fully accessible wealth which is actively managed by the investor. o Any wealth which is lost, inaccessible, held in an illiquid state, or cannot be accessed freely without penalty is not liable for Zakat. • If the wealth in the retirement fund is designated for the employee then he must pay 2.5 percent of that amount only when he cashes out without penalty at the time those funds are made available to him. • If he or she chooses to cash out early and pay the penalty then they must still pay Zakat on the amount withdrawn immediately at the time of availability regardless of the matching funds contributed by his employer or not. • If he is not allowed to cash out, but instead is forced to take a loan from the 401k fund and pay it back with interest, then he or she will not pay Zakat on this amount until it remains in possession for one year after receiving it from the 401k fund. • You pay 2.5% on the amount available to you at the time the money is made available to you without penalty. You do not compound 2.5% for the entire tenure of the investment; you only pay 2.5% for one year on the amount made available at cashout without penalty.
Answer:
I first answer your question based on the traditional understandng of zakah before sharing my own view with you:
Theoretically any amount of money may be subjected to Zakah as a ‘product’ or as ‘wealth’. People normally pay part of their salary as pension. Assuming that the person used to pay the Zakah of his salary (which can be the tax that is deducted from it) then no further Zakah is due on the pension money as a ‘product’.
Whenever the person has access to the retirement money (whole of it or part of it, in lump sum or as a regular payment or both, as his own and not as a loan) then if any part of this sum is lying idle on the annual Zakah calculation day of the person, assuming it is above Nisab, it will be zakatable wealth on which 2.5% will be paid out.
I think the above brief explanation covers all the situations that you referred to in your question.
*****
As for my understanidng of zakah:
Zakah is the very tax that you pay to the state and no more zakah is due other than the tax that the state demands. Therefore in the presence of law for taxes, you only need to pay what the state requires as tax. This applies to anything, including retirement account. The only exception is when there is no civil law for taxes. I am not aware of any civilised country at our time that would fall in this category.
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Revised July 2016
