We are in the process of checking with a qualified scholar, but I thought that as 401K isn’t really yours until you retire or leave the job, you don’t have to pay zakat on it. Now I’m hearing a differently.
Do you guys have any information on this?
Re: Is there zakat on 401K?
Peace Sister Niksik
But if we give a loan to someone and we agree not to get the money back before we reach a certain age then the zakat on the loan is still counted regardless of whether it is in our 'remit of spending' or not. Or if 401K is viewed as investment in businesses then zakat is due on all business as well. In order to work out whether 401K is zakatable or not is based on its closest resemblence with money matters at the time of the holy prophet Muhammad (SAW).
Re: Is there zakat on 401K?
Hmmm, makes sense, but 401K is like providend funds back in India/Pakistan. If you borrow from it before the maturity time, you have to pay a penalty and pay it back...not like your savings to which you have access whenever no questions asked. It is an investment for sure but not accessible...I don't know...
Re: Is there zakat on 401K?
Again I would say what type of monetary initiative most resembles it from the time of Muhammad (SAW) and then see whether it has zakat or not. To me it resembles a loan or a shared business venture.
Say a bedoin takes 500 dinars as investment from a Makkan that makes up 50% of a business and goes off to Madinah to start up that business, the bedoin promises to return the value of 50% after 15 years, and any demand to pay back sooner would result in a loss of yield by the end of the 15 years because there was less to make consistent growth. At first there is no easy access to Madinah anyway and secondly the agreement has this caveat of loss should money be returned earlier than 15 years. So in this scenario we have something that resembles the 401K ... I don't think there is anywhere in zakat law that reduces or cancels zakat for either share owners of the business based on accessibility to the cash capital. It just makes ordinary business sense that if money invested is returned early then growth will be slower meaning lower returns in the long run.
Re: Is there zakat on 401K?
From my understanding 401(k) is like any ‘stock trading’ account though the difference is you pay 30% penalty on early withdrawal. So lets say if your 401(k) touched USD 100,000 as bottom (lowest value in the year) then your zakat will be on USD 70,000.
Re: Is there zakat on 401K?
^ That's only if you have had to pay the penalty first. If the money is untouched for a year then the zakatable amount is 100k, which is 2.5k in absolute terms.
Re: Is there zakat on 401K?
^ That's only if you have had to pay the penalty first. If the money is untouched for a year then the zakatable amount is 100k, which is 2.5k in absolute terms.
From the $100k the 10% is deducted upfront (when withdrawn) by most brokerage houses and 20% is to be paid later on. Basically you can't avoid the 30% penalty, so the $100k is not yours, effectively you only own $70k so you can't be paying zakat on the money you don't really own.
Re: Is there zakat on 401K?
Can you guys speak in english 
Re: Is there zakat on 401K?
Niksik, I asked this question with our masjid's Imam who is very qualified one. As per him there is no zakat on 401K till the time we get it in the end and start utilizing it as our investment. At that time we'll have to pay on wutever the amount is summed up.
P.S.: Actually I'm myself confused while writing this, so i'll double check. But thats for sure he said we dont have to , right now
Re: Is there zakat on 401K?
Grand Imam in Detroit (Troy) Masjid gave a detailed lecture on Zakaat couple of Jummah back. He mentioned that zakat is wajib on 401K, any stocks, vested options and mutual funds. Also he specifically said that zakat is due on Luxury items that according to Sharia are not necessities (even though we think otherwise in today's world), such as TV.
Re: Is there zakat on 401K?
In plain English, 401(k) is zakat-able on the amount you will actually own after paying the penalty (30%).
Re: Is there zakat on 401K?
Zakat is levied on unused capital that is lying idle. If the 401K is invested in the market, (e.g., commodities, stocks etc), then perhaps there shouldn't be any Zakat due on it.
Re: Is there zakat on 401K?
^ any 'stocks/mutual funds' etc account is 'cash' and is zakat-able.
Re: Is there zakat on 401K?
From the $100k the 10% is deducted upfront (when withdrawn) by most brokerage houses and 20% is to be paid later on. Basically you can't avoid the 30% penalty, so the $100k is not yours, effectively you only own $70k so you can't be paying zakat on the money you don't really own.
Peace Captain1
The fact that the money is not accessible does not mean that it does not "effectively" belong to the person. You have failed to see what I was saying ... Say a person has $4000 in his current account and $100k in his 401k. If this has been the case for 1 year then the zakat to pay is $100 + $2500 which gives a total of $2600 to be given in zakat. This will come out of the current account and the 401k remains untouched.
On the other hand if the person has only $2400 in the current account and $100k in the 401k for a year then the zakat to pay is $60 + $2500 = $2560 resulting in $160 to be taken from the 401k. To do this the money would need to be accessed so the penalty applies, but the amount of zakat does not come down because for the year duration that money was being held.
The only way the zakatable amount will be reduced is if before the 1 year is up the 401k is accessed and the charge applies then the remainder amount is zakatable only because only that amount has been in the account for the 1 year period. It is not important whether the money is "effectively" the owners or not. The fact that it is kept for 1 year means the zakat is applied on it.
Re: Is there zakat on 401K?
Zakat is levied on unused capital that is lying idle. If the 401K is invested in the market, (e.g., commodities, stocks etc), then perhaps there shouldn't be any Zakat due on it.
^ any 'stocks/mutual funds' etc account is 'cash' and is zakat-able.
Peace people
This is where it is important to make the proper analogy for the 401k account. I believe the 401k is a business not really a cash fund.
Re: Is there zakat on 401K?
Peace Captain1
The fact that the money is not accessible does not mean that it does not "effectively" belong to the person. You have failed to see what I was saying ... Say a person has $4000 in his current account and $100k in his 401k. If this has been the case for 1 year then the zakat to pay is $100 + $2500 which gives a total of $2600 to be given in zakat. This will come out of the current account and the 401k remains untouched.
What if the account is not fully vested? In that case your account may show $100k but if it is only 20% or 50% vested, do you still pay Zakat on 100%?
However, I disagree on what you already said above. Zakat is on the money you 'own', you don't own 100% of 401(k) if you were to withdraw without reaching qualified age, Zakat is to be calculated on 'cash', 'cash equivalent' which in case of 401(k) is 70% of the account for non-qualified owners.
On the other hand if the person has only $2400 in the current account and $100k in the 401k for a year then the zakat to pay is $60 + $2500 = $2560 resulting in $160 to be taken from the 401k. To do this the money would need to be accessed so the penalty applies, but the amount of zakat does not come down because for the year duration that money was being held.
The only way the zakatable amount will be reduced is if before the 1 year is up the 401k is accessed and the charge applies then the remainder amount is zakatable only because only that amount has been in the account for the 1 year period. It is not important whether the money is "effectively" the owners or not. The fact that it is kept for 1 year means the zakat is applied on it.
Do you pay Zakat on money you had in your possession but it was a loan from someone?
Re: Is there zakat on 401K?
What if the account is not fully vested? In that case your account may show $100k but if it is only 20% or 50% vested, do you still pay Zakat on 100%?
However, I disagree on what you already said above. Zakat is on the money you 'own', you don't own 100% of 401(k) if you were to withdraw without reaching qualified age, Zakat is to be calculated on 'cash', 'cash equivalent' which in case of 401(k) is 70% of the account for non-qualified owners.
Do you pay Zakat on money you had in your possession but it was a loan from someone?
To answer your last question ... the answer is no, you don't pay zakat on money you have in your possession when that money is a loan from someone. Rather if you loan an amount to someone, even though that money is not accessible to you, you still pay zakat on it. If you fulfil the terms of the 401k then you will get 100% of funds in the 401k account, afterall it was built up with your money, so it is owned by you .. look I don't see where you going with this. Read what I wrote with a bit of patience.
I realise what you are providing are the opinion of some scholars, but the reasons given don't make sense when you compare them to similar conditions such as with the Islamic loan.
Is the zakat paid every year? or not?
Is the zakat paid on the accessible amount only? or not?
Some have said that zakat is only applicable when the account reaches maturity, but if we should follow this fatwa we will inhibit the true intent of zakat.
The idea of setting aside large amounts of wealth goes against the ethos of wealth in Islam. Zakat is hence applied on savings and not on income. It encourages spending and averts recession, but putting fatawa that do not take into consideration the true intent of zakat, then zakat becomes less effective.
Re: Is there zakat on 401K?
nuradli.com/if7.ppt (put in url)
If you read this presentation you'll see the less lenient view that is applied on businesses. 401k should really be treated as a stocks and shares company.
The only area that is debatable is the penalty for early withdrawal.
Since dead assets are not zakatable - but in reality one should ask were they dead before the account was accessed or was the penalty applied only after it was accessed and those funds would have continued to grow?
The idea of zakat is that a balance between income and saving is maintained. Lots of saving becomes a burden to pay zakat for hence those with fewer earnings will be forced to eat their savings and hence pay lower zakats.
Re: Is there zakat on 401K?
What about income tax on the 401K amount? Tax is applied only when you withdraw, so that part is not going to be "your money".
Re: Is there zakat on 401K?
What about income tax on the 401K amount? Tax is applied only when you withdraw, so that part is not going to be "your money".
Woah!
Well done Robert ... Your post has made me rethink everything. I'm now going to make a complete 180 degree turn and agree with Captain1. I see now that we should view it like this not that "we don't have access to it therefore it is not zakatable, but instead if we did get access to it how much in real terms would we get"
So let's say we have $100k in the 401k account and we want to assess the real value on it. It will be as though we are talking the whole amount out. We would incur a penalty first, then the amount would be income (capital gains) taxed. I'm not sure about the taxation in US but lets assume the tax comes to around 30%. Likewise lets say the penalty comes to around 30% too. Then we get this formula:
$100k x 0.7 x 0.7 = zakatable amount = $49k hence the total zakat value assuming no debts comes to = $1225
So in reality we leave the money in the account but to calculate the zakat we need to pretend as though we are making a full withdrawal ... the argument of "not having access" to it is not applicable because Qiyas done over how loans are handled in Islam, but this is a much better way to deal the 401k account. Thanks Robert and Captain1 yes I agree with you now. :)