M Babu asks:
As Salamualikum. Ramadan ul Mubarak. I need to understand zakat on retirement funds contributed by both employer and employee. As a teacher, I have a TIAA-CREF retirement account where I contribute and my employer contributes a matching percentage of the salary. All my investment is in stocks since other options are interest bearing. I can not receive the cash until it vest when I reach retirement age. Do I have to pay zakat on the amount of this retirement fund that has been accumulated?
Another Questioner asks:
I am looking for clarification on rules for zakat on stocks and zakat on 401K.
1) Below excerpt from _____ fund web page says zakat of 10% is due on INCREASE of asset and not on the base asset. I was under the impression zakath is due on the whole capital. I want to do the right thing. What is the correct basis?
2) The 401K is a fund that is joint contribution by employer and me. It is not yet tapped into as I have not retired. Although I could take withdrawal from it as I am over 59.5 yrs. Is zakth due on 401K (these are in stock fund).
Retirement funds and similar are something many people ask about it.
Let’s look at the issues at hand above based on the two questions presented:
1- How much Zakat is paid on business partnerships and investments?
2- Is my retirement account (such as 401k, IRA, or similar) liable for Zakat?
If you are looking for more information on how to pay Zakat on Mutual Funds and Stocks/shares NOT part of your retirement fund, click on the previous link.
How much Zakat is paid on business partnerships and investments?
Business partnerships and investments are due 2.5% when paying Zakat on them. Mutual Funds, which invest in a portfolio of stocks (shares) are business partnerships and are treated as such when calculating profits and zakat. To make them analogous to agricultural projects is incorrect for several reasons most of which cannot be mentioned in a single post. Those interested can look for module five of my Zakat course entitled “Advance Topics in Zakat Law.”
Is my retirement account (such as 401k or IRA) liable for Zakat?
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.
- Zakat is only due on unhindered, fully accessible wealth which is actively managed by the investor.
- 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.
If you need confidential advice on how to calculate and pay your Zakat, please contact me through this site.