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Do I Have To Pay Zakat On Money Saved For Retirement?
Do I have to pay zakat on money saved for retirement as it will be a lot if I want to live a comfortable life in sha allah and I will have no earning source then.
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20 Replies
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Do I Have To Pay Zakat On Money Saved For Retirement?
updated 11 months, 2 weeks ago
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20
Replies
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Very good question. There could be three scenarios. Either this money is sitting in the bank, invested in liquid investments or invested in non liquid time bound investments. Perhaps a scholar could answer all three scenarios.
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If you meet the nisab, zakat on assets is due on all assets that are not in personal use at the rate of 2.5% per year. This includes all property and savings, including retirement savings.
2.5% zakat per year is not a whole lot. It takes over 600 years to burn a hypothetical amount of $100,000 at the rate of 2.5% per year. Even with that, no zakat is due if we fall below nisab so in essence the hypothetical amount of $100,000 can never become $0 just by paying zakat.
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With all due respect I feel this response fails to account for a number of important practical issues, most importantly that this discussion is around retirement savings- the entire principle and intention of retirement savings is to pay for the basic needs of oneself and ones family while one is not working. The question then must be answered whether that saving is somehow in excess of ones needs- if the answer is that these savings represent a reasonable amount to meet the basic living expenses in the time and space intended (not Arabia 1400 years ago- but today in America with health care costs etc) then how can one justify continually depleting what is necessary for this person to provide for himself and his family in years he is not working? 2.5% is a heck of a lot in a year on year basis- the idea that it takes 600 years is not practical to our reality as very soon in any major city in the US you are below what one needs to even live for one year. What about the person who is sick or injured who saved 3M for his retirement and needs this to live the next 30 years to fulfill his obligation to his family and not burden others? Or even the person who decided to stop working with 3MM saved feeling he can be of more benefit to his family, society and Allah using his capital to Live rather than continuing to work. Let’s say these people need to live 30 years and plan that they can do so in a US city like San Fran for 99k a year . With the principle that zakat is due on the entirety of these funds every year you will see that the expected 99k of spending in the first year actually becomes 174k – the second year becomes around 170k, the third year becomes 165k. He will have owed 222k over the first 3 years of retirement for zakat, and spent over 17% of his money already. No longer is this person able to care for his and his families needs but he will eventually be a burden to others. I don’t see how this logic is within the Islamic tradition and the broader principles governing zakat. Thanks
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Aren’t all savings are some future rainy day?
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Also please note that if the retirement savings are invested in a 401-k or a similar plan, then no zakat is due on it on a yearly basis. Zakat on this amount is paid upon withdrawal. Please see:
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I am from India and we do not have 401 scheme here.we plan to invest in mutual funds in sha allah ,so the whole amount will be in our possession and the amount of zakat due will be 4-5 times more than what I pay now when I am earning.
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Also if you could plz answer, if there is no zakat on money saved for child education or marriage then why do we have pay zakat on retirement money as In sha allah we plan to live off it for as long as we live
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The principle is that assets in personal use are exempt from zakat. That’s why jewelry for a child’s wedding is considered exempt. Same is the case for a child’s education – it’s a pre-determined future personal expense that one can make an ijtihad to make it exempt from zakat. Zakat is applicable on any assets that are meant to save money, which includes retirement savings.
Hopefully the following two videos will shed some light:
Please also see the following Zakat FAQ with answers to many related questions.
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Can you elaborate how saving for eduction is a pre-determined future expense but retirement savings are not? There is no logic in saving for retirement except for the purpose of ones own pre-determined future expected expenses. If you are discussing saving to give an inheritance to kids, I would agree but the entire principle around retirement in the modern western world is to save so that one can care for oneself and ones families needs from the time they stop working whether this be due to age, illness or simply preference as to how they wish to spend their time here. This reasoning must be applied differently to the savings of a 20 year old who is in no way thinking about these expenses with a specific intention and the 40, 50 or 60 year old who has been working decades and is ready to be done and clearly is intentional about exactly what he needs over a given time frame to care for his and his families needs while not working. Clearly you are agreeing that zakat should not deplete education savings and I should see no reason you would not agree to apply the same reasoning to savings which plan for even more fundamental expenses in life such as health care or housing. Thanks
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Children’s education expense is one’s commitment to provide for one’s children so one may make an ijtihad for their exemption. “Retirement” is just a big bucket for all future expenses after a certain age. Exempting that completely nullifies the spirit of zakat.
Whether a person holds a piece of land with his excess money holds an account and assumes it to be for retirement, materially there’s no difference between them. They’re both assets not in personal use hence are subjected to zakat.
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Greg, I went through the same arguments in my head as you. There are problems with every approach. If you say there is no Zakat on retirement or Children’s wedding, or education, then who would set the maximum limit on these and how?
Similarly, the concept that there need to be no Zakat on investments, exempts all rich people from Zakat as they always keep their money invested or in personal use.
Putting Zakat on all assets including investments each year doesn’t make sense.
My Ijtihad is to look at the purpose of Zakat. It is to move money from rich to the poorest of poor to help them and to eliminate severe poverty. Also to put money in circulation from bottom up, rather than just between rich people.
My Ijtihad is that once Zakat is paid once on earning, then it shouldn’t need to be paid on savings. But then it needs to be paid yearly on you total living expense, total assets in personal use, such as homes, cars, boats, cash in use, living and leisure expense. Also, Zakat need to be paid when money is drawn for Children’s education or wedding. Or money is drawn for personal use, such as retirement expenses.
Furthermore, Zakat need to be paid on all assets when a person dies.
I think this solution makes things simple and workable in modern economy and also keeps the intended purpose of Zakat alive.
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So my solution is that except for people in business, people need to pay Zakat on their yearly pay or agricultural production. They also need to pay Zakat when they draw money from savings for personal use, or for Children’s wedding, education or for retirement expense. They also need to pay Zakat on all assets when they die.
People in business need to pay Zakat on their total yearly living expense and on the value of total assets in personal use. They also need to pay Zakat on all their assets when they die.
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Also, the concept that any Taxes paid to government offset the Zakat. It doesn’t make sense. Most of the tax money never reach poorest. I think we need to pay Zakat on earnings after tax to fulfill the intention of Zakat and transfer the money to the poorest.
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10% Zakat on the money someone saved after paying Zakat on the original income. Wouldn’t the retirement savings be left half in about 10 to 12 years? If I understood it correctly, the invested money does not incur Zakat. Perhaps someone saving for retirement need to put the retirement money in a time bound investment and not keep as cash.
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5% or 10% zakat is only on production / earnings, not on savings. I urge you one more time to go through the material that I have shared with you several times before to understand the concept of zakat. It will take some time, however, it will clarify all the confusions.
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Faisal I went through all material many times, but it is difficult to remember everything and all scenarios and exceptions. I need to make some reference sheet.
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Faisal I just checked the references you provided. On retirement fund, it is 10%. I guess it applies if someone decides to take the lumpsum.
So if someone takes lumpsum, he pays 10% first time and then 2.5 percent each year if he doesn’t reinvest the cash.
If person takes monthly, then no Zakat if within Nisab but any amount above Nisab requires 2.5 percent Zakat.
If someone saves for retirement, but doesn’t invest, then 2.5 percent each year on saving.
Hopefully I got it right this time.
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Suppose a person does not want to invest in stocks or have the means- Why should he be forced to work longer because of the zakat burden or or have more of his wealth depleted simply because he does not want to do the financial and legal gymnastics of the extremely wealthy Muslims who find ways to justify avoiding paying 2.5% on all of their assets? This burdens those who lack information and access to financial services as well as those with less resources and thus makes these types of rulings questionable and not practical. Getting too into the weeds we miss the more essential principles of Islam. There should not be a distinction between cash and stocks or other fancy financial instruments- a person should also not be incentivized to participate in what is a more risky endeavor, the financial system, than keep cash for the future of his family. In the modern day and financial strategies, this type of reasoning may actually incentivize more risky investments – people will feel their stocks must return 2.5% just to pay for the zakat on their assets and this is in fact more, as this 2.5% is needed as an after tax earning, so some may need to actually achieve 3-5% earning depending on the type of gain just to pay zakat. So now people cannot simply be content with relatively safe investments, protecting their families healthcare, education and housing but need to enter into more risky investments which not only risk their basis but then risk their future ability to pay zakat and help others in addition to their family.
Things should be made easier for those who work their whole life to save, and not just for wealthy elites. Furthermore we should encourage safety not risk- if our zakat reasoning encourages risk I would argue it is not in the correct direction.
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On production / salary there’s 5% or 10% zakat due every time there’s production (or paycheck received).
On assets / savings (whether they’re invested or not) there’s 2.5% zakat due every year.
Retirement funds and pensions are essentially salary paid in the future for work performed in the past so the same production percentages apply on withdrawals. Also since the total amount is generally not in your control, you don’t pay asset zakat on it. If any portion of it is saved and becomes your asset then you pay the asset zakat on that portion in the future.
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I’m sorry, but there are two different opinions about whether Zakat should be paid on pension. Most Zakat collectors say it should be paid, while many independent scholars disagree. To be eligible for Zakat, you should have unrestricted access to your money or assets. However, accessing pension funds before maturity can have significant consequences. Many people invest in pensions to avoid financial loss.
Let me explain my situation. If I contribute £10,000 to my pension each year, my monthly net wages are around £XXX. If I don’t contribute, I get around £XXX per month. So, I have a choice: take £1,800 per year as additional salary or invest £10,000 per year in a pension with restrictions until I’m at least 55 years old. Even after 55, I can only withdraw 25% tax-free each year, and if I withdraw the entire amount, 75% is subject to income tax. It’s not accurate to say I have free access to pension funds.
Now, let’s talk about the 2.5% Zakat per year. Faisal Haroon argue that it’s not a lot. Using a hypothetical amount of $100,000, at a 2.5% rate, it would take over 600 years to deplete the whole amount. However, arguing about whether it’s a large or small amount is irrelevant because it’s a religious command to pay it. We believe Zakat doesn’t make one poor; instead, it increases wealth. The calculation suggesting it would take 600 years is misleading.
To make a decision, consider seeking fatwas from reputable muftis who aren’t Zakat collectors. Assess their arguments and follow the fatwa that you find most compelling. Keep in mind, I’m not an Islamic scholar, so research and form your own opinion.
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