In the Name of Allah, Most Gracious, Most Merciful.
All praise and thanks are due to Allah, and peace and blessings be upon His Messenger.
In this fatwa:
It is not obligatory to pay Zakah on what is known as retirement money (i.e. the pension paid to the employee upon his retirement) unless the money is really possessed.
Regarding your question, Dr. Muzammil H. Siddiqi, Former President of the Islamic Society of North America, states:
The basic rule of Zakah 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 scholars 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:
The employee’s contribution to this fund is Zakatable if it is done by his/her own choice. There is no Zakah due on these funds if the employers due to the company or government’s policies collect them by force. Zakah will be due on these funds when they can be withdrawn.
If these funds are withdrawn and they reach the value of nisab (3 ounces of gold or its cash value) and a year passes on them, then the Zakah (at the ration of 2.5 per cent) will be due.
The Zakah 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.
Shedding more light on this issue, Dr. `Abdul-Azeez Al-Qassar, Professor of Comparative Jurisprudence, Faculty of Shari`ah, Kuwait University, says:
It is not obligatory to pay Zakah on what is known as retirement money (i.e. the pension paid to the employee upon his retirement) unless the money is really possessed. Muslim Jurists state that the person who is going to pay Zakah should possess the money he is going to pay. So far, as it appears in your question, that such pension is not actually possessed by the person for the time being, hence it is not obligatory to pay Zakah on it till it falls into his possession in one way or the other.
According to the consensus of jurists, it is not permitted to pay Zakah two years in advance.
Almighty Allah knows best.
Editor’s note: This fatwa is from Ask the Scholar’s archive and was originally published at an earlier date.