Zakat on 401K and IRA Accounts

Q. I have a question about Zakat on 401K or IRA accounts. As you know these are retirement plans that many companies offer to their employees. Some time employee has to contribute to it to be eligible for any withdrawals or some time companies deposit money for their employees. Either case employees are not suppose to take money out of these accounts until the age of 59 and 1/2 years. But if you want to take money out of this account than you have to pay 10%penalty as well as taxes according to your current tax bracket. My question is do we need to include this amount when calculating Zakat amount or we don’t have to include it. and we should include these amounts how much? What I normally do I look at the balance and calculate net amount I could get if I make a withdrawal today and pay Zakat on that amount.

Is this correct? I appreciate if you answer my question before Ramadan ends. thank you very much.

A. I have written on this subject before. In the following I am reproducing my earlier answer to this question. The basic rule of Zakat is that it is due on the wealth that one owns and has the freedom to use. I think this 401K Account is similar to what is called “Provident Fund” in India and Pakistan. A committee of ‘Ulama’ 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:

1. The employee’s contribution to this fund is Zakatable if it is done by his/her own choice.
2. There is no Zakat due on these funds if they are collected compulsorily by the employers due to the company or government’s policies. Zakat will be due on these funds when they can be withdrawn.
3. There is no Zakat due on the company’s matching contributions until they can be withdrawn.
4. When these funds can be withdrawn, then if they reach the value of Nisab (3 ounces of gold or its cash value) and a year passes on them, then the Zakat (at the ration of 2.5 per cent) will be due.
5. The Zakat must be paid for the money that one receives and then voluntarily contributes to a retirement fund (such as IRA etc.), if it reaches the Nisab and after a period of one year. (For more discussion on this subject one can consult, Majallah Fiqh Islami, Masa’il al-Zakat, volume 5, part 2, Qazi Publishers, New Delhi, 1994) Zakat for Mosque Construction

Q. Can Zakat money be given for the construction of Masjid, Islamic School and community center in non-Muslim (North America) countries? Keeping in mind that building Masjid, school, and community center in non-Muslim countries is a way to establish and spread Islam. If Zakat can be given for the above mentioned projects than what are the restrictions and what is allowable?

A. In the Qur’an, Allah subhanahu wa ta’ala has mentioned 8 categories of people who can receive Zakat. Allah says, “Alms are for the poor and the needy, and those employed to administer the (funds); for those whose hearts have been (recently) reconciled (to the truth); for those in bondage and in debt; in the cause of Allah; and for the wayfarer: (thus is it) ordained by Allah, and Allah is full of knowledge and wisdom.” (al-Tawbah 9:60) The expression “in the cause of Allah” (fi Sabil Allah) was generally interpreted “Jihad fi Sabil Allah” and so many jurists restricted this Zakat expense for this purpose.

Muslim jurists also say that in the Qur’an Allah used the word “li-al-fuqara’ wa al-masakin. (for the poor and needy).” and the “lam (for)” here means “tamlik (possession)”. Thus they interpret the above verse to mean that the poor and needy should be made owners of this money (tamlik al-Zakat). Since in public and social welfare projects no one becomes the owner, so, according to their interpretation the Zakat should not be used for this purpose. Thus you will find in the books of Fiqh statements emphasizing that the money should not be used to build Masajid, schools, hospitals, hostels etc. because this money belong to poor and it should be given to them. There are some jurists who still hold this strict opinion in the matter of Zakat.

However, there are a number of jurists of this century, such as Muhammad ‘Abduh, Rashid Rida, Maulana Mawdudi, Amin Ahsan Islahi, Yusuf al-Qaradawi and some Fatwa organizations in Kuwait and Egypt, they are of the opinion that “in the cause of Allah (fi Sabil Allah)” is a broad category and it should not be restricted to Jihad only. It is a general term and it should be applied in all those situations where there is a need to serve Islam and Muslims. These scholars consider it permissible to use the Zakat money to finance the da’wah and public welfare programs. They say that the expression “for the poor and needy” can also mean “for the benefit of the poor and needy”. Also later in the same ayat “fi sabil Allah” is used which means “in the cause of Allah” and it does not imply possession.

The modern jurists also argue that in the past Muslim governments used to build mosques, schools and used to finance public welfare projects. Now many governments are negligent in this matter. Many Muslims are living in areas where there are no Muslim governments. Furthermore the financial needs of the people have become so enormous and diverse that earlier rules and restrictions cannot be fully applied and may not be very useful in every place. Dr. Yusuf al-Qaradawi in his famous book Fiqh al-Zakat has thoroughly discussed this subject. His fatwa is that in non-Muslim countries it is permissible to use Zakat funds to build the Masajid, Schools and hospitals also.

Muslims from all over the world go to Saudi Arabia, Kuwait, Arab Emirates etc. to solicit funds for the building of their mosques and schools. Most of the business people in those countries give their Zakat for this purpose. Many people from all over the world use this money for building projects without any question. Now, there are many people who come to North America to solicit funds for their mosques and schools in some poor countries. American Muslims are also giving their Zakat to build Masajid and schools in other countries. It is “fi Sabil Allah” and it is helping the Islamic cause in many lands where it would have been very difficult to establish Islamic institutions and mosques without it.Zakat is basically for the poor and needy and most of it should be used to take care of their needs. I believe that for the mosque constructions Muslims should make extra charity and should give from funds other than Zakat. However, it is not forbidden for Muslims to give their Zakat money for the building of Mosques and schools, especially in non-Muslim countries. The Islamic centers should have a separate Zakat fund. Those who do not want their Zakat to be used in building projects, should give their money to the Zakat fund. But those who want to give their Zakat for the Masjid construction they should donate directly to that project. How to repent from sins?

Q. Over the past two years I have been spending a lot of my time with a Christian girl I met. During that time we have fallen in love and have done things that we know are not accepted by either of our religions. I feel bad and remorseful, I want to marry her and she is willing to convert to Islam. My question is “how can I repent for my sins and ask for Allah’s forgiveness?” My other question is regarding my family, how do I approach them (they are very religious)? Anonymous

A. Many Muslim youth in Europe and America are getting trapped in this manner. Some people begin this relationship in a very innocent manner. They think that they are very strong, but Shaitan plays his role and then they indulge in all kind of Haram acts.

You have indeed committed a major sin. You should repent very seriously and immediately. Ask Allah to forgive you. Take a shower with the intention of repentance, perform 2 rak’ah of nafl prayers and then turn your attention to Allah and say with the sincerity of your heart, “O Allah, I did much wrong to myself. None can forgive my sins except You. O Allah, forgive me and have mercy upon me. Indeed You are most Forgiving, most Merciful.” Observe your regular prayers and involve yourself more in Islamic work. Give sadaqah to the poor and needy with the intention to purify yourself. Never commit this sin again. Do not have any relations with this woman, unless she accepts Islam. Make sure that her Islam is not just for marriage, but she is genuinely and sincerely accepting Islam. Then, if she accepts Islam, Allah will forgive her past sins and she will be a new person and it will be permissible for you to marry her.

Introduce her to your family and seek their consent for this marriage. It will be, most probably, a big shock for your family and it will break their hearts. It might be difficult for them to accept this marriage, but whatever you decide, keep your good relations with your family. Do not separate from them or leave them because of this relationship. With wisdom and patience you will be able, inshallah, to keep your whole family together. May Allah forgive you and bring you to the right path.