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Zakat On Pre-tax IRA Account
I listened to the video “Zakat Ke Masail…..”. I had a related question. I am retired and I received my pension as a lump sum which is invested as a pre-tax IRA account. Currently I’m not able to withdraw any money from this account due to healthcare insurance cost congratulations. Furthermore, if I withdraw any money from this IRA account, I will have to pay both federal and state taxes. Is there any zakat due on this account which is totally invested into the stock market and is also currently suffering losses?
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8 Replies
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Zakat On Pre-tax IRA Account
updated 1 year, 8 months ago
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8
Replies
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I want to correct a typo. Instead of “congratulations” I meant “considerations”. Apologies for the typo.
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Pension is subjected to 10% production zakat, however, it only becomes due when you receive the pension. The principle is that for zakat to be due on an asset/earning, it has to be at one’s disposal (tasarruf). If the funds so invested are at your disposal then Zakat will be levied on that amount, initially 10% production zakat on gross amount and if it stays with you till year end and becomes a part of your wealth, then 2.5% Zakat will also be levied being Zakat on Assets/Wealth at year-end.
It must be noted that taxes paid to the state in any form are eligible for deduction from Zakat obligation. But if one is still not in a position to Pay Zakat obligation because of a genuine net loss, then Zakat obligation would be considered waived and one should do Charity to the best of their ability.
Please also see for Pension:
Complete Law of Zakat in summarized form:
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Thank you very much for your kind response, which made some things clearer. However, I’m still a little unsure about the details. I was wondering if you would be kind enough to go over with me with a realistic example. I have $10,000 in my retirement account which is invested in the stock market and it’s current value is $9000 due to the markets being down. If I get a distribution/withdrawal of $1000 then I’ll have to pay at least 15% federal and state taxes. So my question is how much zakat is due in this case, if any, bearing in mind that the value of the investment has dropped and I’ve already paid 15% taxes on it?
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The pension amount, as soon as it is made available to the individual, will be subject to 10% production Zakat irrespective of the subsequent treatment of that amount.
The subsequent treatment of this amount would vary depending upon the nature of investment being made from that amount.
The following two scenarios are being discussed with assumption that the amount of pension has been given to you or you have every right to withdraw this amount, but the amount is set aside in an investment account. These scenarios relate to subsequent treatment of that amount.
Scenario 1:
If the amount is in the form of a simple investment and is available for withdrawal any time and has not taken any form of means of production (i.e. in actual form of stocks) then this amout would be considered a part of wealth (or assets) which is used in the calculation of Zakat on wealth subject to 2.5% Zakat on year-end wealth (or assets) which are above Nisab.
Scenario 2:
If the amount is invested as such that it has taken form of any means of production like actuals stocks and shares or is tied up as an investment not available for withdrawal, then this investment amount would be considered as means of production which would be exempt from Zakat and the return from this investment would be subject to 10% production Zakat if it is above Nisab.
And at the time of Zakat on wealth calculation at year-end, this original amount of investment would be exempt from Zakat calculation but returns, if they beomce part of welath at year-end, would also be subject to Zakat on wealth at 2.5%.
As you can see from the above explanation that decline in the value of investment has no material impact on the calculation of Zakat. It is the nature of investment which determines its treatment.
As far as the taxes are concerned, all form of taxes paid to the government are eligible for deduction from Zakat obligation and if they are more than the Zakat obligation then there will be no Zakat payable for that year. Taxes paid over and above Zakat obligation can also be carried forward for adjustment against future Zakat obligation in the subsequent years.
I hope this will clarify the issue.
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Yes indeed, it’s much clearer now. I really appreciate your taking time and patience. Jazakallah!!!
The only issue that I’m still not a 100% sure is related to what you mentioned about the taxe obligations. I wanted to understand it with your kind help using a simple example. Let’s assume that I received a distribution of $1000 from my IRA account. Now, from the aforementioned discussion, the zakat due on this is $100.
However, I’m obligated to pay $150 towards government taxes. From your statement given above, is my understanding correct that in this particular example there’s no zakat due since my government taxes are higher than the zakat dues?
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You received a distribution of $1000 from your IRA account, the zakat due on this is $100 (assuming that it is above Nisab because amount of production/earning/wealth below Nisab is exempt from Zakat). You paid $150 in government taxes.
Now come year-end (which is one date in the year fixed by you for calculation of Zakat on wealth), your Zakat on wealth comes out to be $200. You paid other government taxes of $200 throughout the year.
Your gross Zakat obligation = 100+200 = $300
Total paid in taxes= 150+200 = $350
Net Zakat obligation = 300-350 = negative $50
In this scenario, you have paid more in taxes than your zakat obligation, hence you are not required to pay any Zakat this year. You can carry forward this $50 of more taxes paid this year for adjustment against Zakat obligation of next year.
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You may enter appropriate numbers in our Zakat Calculator after reading the description for each box. When you reach the end, it will generate a statement showing you exactly what you owe after any applicable deductions, and what percentage was applied to each category. It’s also a great way to learn the sharia of zakat.
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Thanks again for your kind response. So I gather from the above discussion that the gross zakat obligation can be offset by the total taxes paid. That’s very useful information.
Jazakallah again.
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