Zakat

Zakat on Retirement Accounts?

Question:
I have a question about zakat on retirement-saving accounts. As you know these are retirement plans that many companies offer to their employees. Sometimes, the employee has to contribute to it to be eligible for any withdrawals or sometimes companies deposit money for their employees. Either case employees are not supposed to take money out of these accounts until he/she retires. My question is: Should I pay zakat on that money, or it is better to wait until I retire, and get access to it?

Answer:
In fact, every Muslim should hasten to pay zakat on its due time as long as the conditions for paying the zakat are fulfilled. The Prophet (peace and blessings be upon him) is reported to have said:

“Islam has been built on five [pillars]: testifying that there is no god but Allah and that Muhammad is the Messenger of Allah, performing the Prayers, paying zakat, making the pilgrimage to the House, and fasting in Ramadan.” [Narrated by Al-Bukhari and Muslim].

As regards your question, Dr. Muzammil H. Siddiqi, former President of the Islamic Society of North America, states:

“The basic rule of zakat is that it is due to the wealth that one owns and has the freedom to use. I think this Retirement Account is similar to what is called ‘Provident Fund’ in India and Pakistan. A committee of scholars under the leadership of Maulana Mujahidul-Islam Qasmi discussed this issue in great detail. In the light of the discussion of the scholars the following points can be presented:

The employee’s contribution to this fund is zakatable if it is done by his/her own choice. There is no zakat due on these funds if the employers due to the company or government’s policies collect them by force. Zakat will be due on these funds when they can be withdrawn.

If these funds are withdrawn and they reach the value of nisab (3 ounces or 85 grams of gold or its cash value) and a year passes on them, then the zakat (at the ration of 2.5 percent) will be due.

The zakat must be paid for the money that one receives and then voluntarily contributes to a retirement fund, if it reaches the nisab and after a period of one year.”

Shedding more light on this issue, Dr. ‘Abdul-Azeez Al-Qassar, professor of Comparative Jurisprudence, Faculty of Shari`ah, Kuwait University, says:

“It is not obligatory to pay zakat on what is known as retirement money (i.e. the pension paid to the employee upon his retirement) unless the money is really possessed. Muslim Jurists state that the person who is going to pay zakat should possess the money he is going to pay. So far, as it appears in your question, that such pension is not actually possessed by the person for the time being, hence it is not obligatory to pay zakat on it till it falls into his possession in one way or the other. According to the consensus of jurists, it is not permitted to pay zakat two years in advance.”

Meanwhile, Dr. Monzer Kahf, a prominent economist and counselor, states the following:

“Zakat on retirement account can be paid every year or you can accumulate the yearly due zakat, year after year, delay payment until you begin withdrawing, and then pay with each withdrawal (it will then be a big portion of each withdrawal). The reason is that zakat is not required to be paid from resources other than the item on which it is due. However, it is certainly permissible (and perhaps much easier) to pay it from your current income every year and I would prefer this approach if you can do it.

Accordingly, you should estimate the amount of due zakat for each of the past four years by looking at the balances in the account, or by making the payment four times on the last year balance (which will be higher than the actual amount because the balance is increased by the monthly additions). Take as a base of calculation the market price of the funds in the account for each year or for the last year, and make the intention that anything you pay extra is a sadaqah.”

And Allah Almighty knows best.

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