The topic of zakat on retirement savings, such as 401k's and IRA's in the United States, is of paramount importance to Western Muslims who often keep a majority of their net worth in these types of accounts.

With exception to the eight causes it is acceptable to pay zakat to, the topic of Zakat in the Qur'an is an aggregate principle without much detail. The Qur'an does not give rates, nisab, kinds of wealth that are zakatable, or the conditions for zakatability.

Sunnah, verbal and practical, provides the details of Zakat. Allah swt says

وَأَنزَلْنَا إِلَيْكَ الذِّكْرَ لِتُبَيِّنَ لِلنَّاسِ مَا نُزِّلَ إِلَيْهِمْ وَلَعَلَّهُمْ يَتَفَكَّرُونَ

"And We have sent down unto you the message that you may explain clearly to people what is sent for them, and that they may give thought."

Surah An-Nahl, Chapter 16, Verse 44

Since there were no retirement accounts at the time of the prophet pbuh, there is no direct answer in the Sunnah to the question do you owe zakat on retirement savings?

Therefore, some thought is required.

Generally, savings are zakat eligible if they meet the 4 conditions for zakat: Ownership and control, Nisab, Hawl, and Idleness (this 4th condition is often referred to as Growth but I think Idleness captures the heart of the matter better, I will explain why in a future article).

The issue with zakat on retirement savings is that you can't access it before a certain age without paying penalties for early withdrawal.

So the real question we're trying to answer isn't simply Do you owe zakat on retirement savings? rather, Do you owe zakat on retirement savings that you can't access without penalty?

My answer to this question is “no”, and here are my reasons:

Reason #1: Paying Zakat on Retirement Savings Could Force Payer into Debt

Adam has $200,000 sitting in stocks in a retirement account. He has $3,000 in cash in his bank account.

Assume for a second that the due amount of zakat on his retirement balance is 2.5% (Not saying I agree with this, but just walk with me through this example which is meant to illustrate a point).

In this case, Adam’s zakat bill would be $200,000 * 2.5% = $5,000.

The man only has $3,000 penalty-free cash available.

So, what is he to do?

Borrow $2,000 to pay his zakat bill??

In fact, he’ll likely need to borrow more so he’s not walking around with no money at all.

Ibn al Humam writes, "zakah is legislated to help and relieve the poor without impoverishing the rich, by having the rich pay from their surplus."

Forcing Muslims to take out loans to pay zakat on retirement savings risks impoverishing the payers.

Reason #2: Imposing Zakat on Retirement Savings Penalizes Payers

The other option for Adam is to actually pull $5,000 out of his retirement account and incur penalties on this amount.

This means his zakat costs were more than $5,000. 

Unless of course we want to invent an unheard-of method for calculating zakat: 

Zakat = (Zakatable Asset * 2.5%) - Penalties 

This formula doesn’t exist anywhere in scholarship for good reason: there should be no penalties incurred when paying zakat.

Incurring a penalty to pay zakat runs afoul of the spirit of zakat which is not meant to penalize the payer unnecessarily.

Take for example the rule about giving zakat on agricultural products:

وَهُوَ الَّذِي أَنشَأَ جَنَّاتٍ مَّعْرُوشَاتٍ وَغَيْرِ مَعْرُوشَاتٍ وَالنَّخْلَ وَالزَّرْعَ مُخْتَلِفًا أُكُلُهُ وَالزَّيْتُونَ وَالرُّمَّانَ مُتَشَابِهًا وَغَيْرَ مُتَشَابِهٍ ۖ كُلُوا مِن ثَمَرِهِ إِذَا أَثْمَرَ وَآتُوا حَقَّهُ يَوْمَ حَصَادِهِ ۖ وَلَا تُسْرِفُوا ۚ إِنَّهُ لَا يُحِبُّ الْمُسْرِفِينَ

"It is He Who produces gardens trellised and untrellised, and date palms, and crops of different shape and taste (its fruits and its seeds) and olives, and pomegranates, similar (in kind) and different (in taste). Eat of their fruit when they ripen, but pay the due thereof (its Zakat) on the day of its harvest, and waste not by extravagance. Verily, He likes not Al-Musrifun (those who waste by extravagance)."

Surah Al-An'am (The Cattle), Chapter 6, Verse 141

Why on the day of its harvest? 

It's reasonable to think that this timing is chosen in order to spare the farmer from having to harvest at an inopportune time. If they are forced to harvest early or late, then there is a penalty to the farmer for harvesting outside of the optimal harvest window.

The day of harvest for the farmer is the day the farmer thinks it is most advantageous for them to harvest.

Designating the due date for Zakat as the day of harvest is a compassionate provision from Allah swt, safeguarding farmers by allowing them to harvest at the most opportune time.

Conclusion: Do You Owe Zakat on Retirement Savings?

For the practical reasons mentioned above, and because I am the creator of Practical Islamic Finance, I assess no need to pay zakat on retirement savings that are inaccessible without having to pay a penalty.

The arguments I've made thus far were based on the spirit of zakat, however, a more technical justification for my stance would be to say that the first condition agreed upon by scholars for something to be a zakatable asset is that the owner must have perfect ownership and control of the asset.

In the case of incurring a penalty if you move funds out of a retirement account, it seems logical to conclude that the owner's control of these assets is not perfect since perfect control implies the ability to move the asset in a reasonable manner without penalty.

As with everything, this is my assessment and it may be wrong and it may change in the future. If you think someone else made a stronger argument then go with that other person's opinion.

The next question I would like to tackle is: Is Zakat Owed on Stocks?

As always, Allah swt knows best.