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In the US there is a retirement program called 401(k) plan. How do we pay Zakat on the 401(k) plan since it is not in out posession till the age of 59 1/2.

Answered as per Hanafi Fiqh by Askimam.org

Details regarding the 401(k) plan. Upto 10% of a persons pay check before tax can go automatically into the 401(k) plan. This amount cannot be withdrawn from until the person reaches the age of 59 1/2. Then whatever amount is taken is taxed. Now in many cases the amount in the 401(k) which is usually kept in stocks of various companies can grow very fast and a person making a salary of $40,000 may have $500,000 in his 401(k) plan. Since money cannot be taken out of the 401(k) plan how do we pay Zakat? Should we calculate the amount in our account and keep a record and pay when we can withdraw it. If this is the case should we deduct tax each year from our calculations. This question is asked by many people therefore kindly please give a detailed answer as will it will help many others. Jazakallah Khairan.

Answer

If a person voluntarily enters into the 401(k) plan, then the ruling of
Zakaat on the plan will be according to every person’s financial situation.
If he is liable to pay Zakaat, then the 401(k) plan must be included into
the calculations.

Since 401(k) plan is an investment plan, Zakaat will be payable on the
capital amount and dividends if the avenue of investment is buying and
selling merchandise. If the avenue of investment is only of leasing, then
Zakaat is payable only on the dividends, not on the capital amount. The
Zakaat may be paid every year or at once for the past years upon maturity at
the age of 59 and a half.

and Allah Ta’ala Knows Best

Mufti Ebrahim Desai
FATWA DEPT.

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This answer was collected from Askimam.org, which is operated under the supervision of Mufti Ebrahim Desai from South Africa.

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