Q14. How do we handle amount of money in a provident or retirement fund such as a 401K account?
If this amount is available to the individual at any time without any restrictions, then Zakat should be calculated for this amount through the category of “Personal wealth” because its nature will be that of savings.
If the plan is restrictive and involves penalty and/or taxes, opinions differ on the payment of Zakat.
- One opinion is that an individual should calculate the amount that is available to an individual after paying an early withdrawal penalty and taxes, and include this remaining amount in the calculation of Zakat as a part of “Personal wealth” category.
- Another opinion is that Zakat should be only paid when the amount is actually received or is fully available to the individual without any penalty. In that case only taxes due on this amount should be deducted. The net amount after taxes (for the year the amount is completely available to the individual) should be included as a part of the “Personal wealth” category.
If the amount is not fully available, we are of the opinion that the value of the pension plan should not be included in the calculation of Zakat. We have taken the opinion that when it is fully available as in case b above, it should be included in the calculation of Zakat.