The purpose of this article is to provide guidance for Muslims regarding three topics that present challenges vis-à-vis zakat payments, especially when large amounts of money are involved.
- Paying zakat on retirement accounts.
- Paying zakat on women’s jewelry.
- Giving zakat money to Islamic institutions.
Zakat on US based Retirement Accounts
With regards to zakat on money, the Sharia stipulates three conditions: The minimum zakatable amount (niṣāb) defined as the current dollar (or other local currency) value of 85 grams of 21 karat gold, the passage of one lunar year (al-ḥawl), and complete ownership (al-milk al-tāmm). It is the later which is critical to define vis-à-vis retirement accounts.
Complete Ownership in the Four Sunni Schools
A quick survey of the Four Sunni schools and quotes from their most famous and relied upon texts make the issue of complete ownership clear:
Ḥanafi School: Ibn ‘Ābidīn says in his Ḥashiyat Ibn ‘Ābidīn, “the condition for zakat on money being obligatory is complete ownership of the niṣāb amount for an entire lunar year.”
Māliki School: Khalīl says in his Mukhtaṣar, “Zakat on money is obligatory once you have the niṣāb amount and complete ownership for a lunar year.”
Shāfi‘ī School: Imam al-Nawwawi says in his Rawḍat al-Ṭālibīn wa ‘Umdat al-Muftīn, “the conditions for zakat on money is complete ownership of the niṣāb amount for a whole lunar year.”
Ḥanbali School: al-Buhūti says in his Kashāf al-Qinā‘ ‘an Matn al-Iqnā‘, “the fourth condition of zakat on money is complete ownership…which is defined as that which is in one’s complete position now, and not related to something else.”
The universal understanding of “complete ownership” in the Sharī‘a is that you have total, unencumbered possession of an asset and can use this asset as you like, whenever you desire. Based on this understanding, your retirement money is not within your “complete ownership” for the precise reason that in order to take a pre-retirement withdrawal, at the time of this writing defined in the United States of America as 59.5 years of age, you are not only taxed on it as income, but you must also pay a substantial penalty as well. From the Sharī‘a point of view this means that the retirement account is specific to you, but not in your complete ownership. Specificity (khuṣūṣiyya) in the Sharī‘a is not the same as complete possession (al-milk al-tāmm), especially when determining matters of zakat. Therefore, from the time you start saving for retirement up until the time of retirement (the 59.5 years of age mentioned above), this money is not in your complete ownership and therefore NO ZAKAT is owed nor should be paid.
After the age of retirement, however, the retirement portfolio does come into your complete possession, meaning you can deal with the funds as you see fit and the penalty of early withdrawal is removed while the potential income liability remains. A this time the issue of Zakat becomes a real consideration. If one were to follow the traditional fiqhi position of zakat on money, one would pay 2.5% of the portfolio every year. However, since the point of these funds is to provide a livable income in retirement, this would slowly diminish the fund over time. To address this specific problem, there is a modern fatwa that is based on sound legal reasoning and interpretation of the primary sources.
Fatwa on Retirement Accounts
Shaykh ‘AbdAllah Mashad (d. 1990), who was head of the al-Azhar’s Fatwa committee provided what is now considered a standard Sharī‘a solution to save financial assets needed in old age or when there is no other source of income. He used the legal thinking ‘Umar Bin ‘Abd al-‘Azīz, the Righteous Umayyad Caliph, as the basis of his fatwa. Umar Bin ‘Abd al-‘Aziz argued that newly acquired lands into the Muslim body politic should be considered an unbreakable asset and rather than pay 2.5% of it as zakat, thus breaking up the land, he argued that a 10% zakat is taken from the agricultural growth on the land. His ijtihad, therefore, allowed for the protection of the asset allowing for economic prosperity, as well as fulfilling the obligation for zakat. You can find this reference in Ibn ‘Abd al-Barr’s extensive commentary on the Muwatta of Imam Malik: (See the Moroccan Ministry of Awqaf’s critical edition in 26 volumes. This particular discussion is found in volume 24:167.)
Shaykh Mashad took this thinking and applied it to retirement accounts. He considered the retirement portfolio to be a fixed asset that produces a certain yield, like the land for ‘Umar Bin ‘Abd al-‘Azīz.. In order to preserve this asset, zakat will be taken from 10% of the profit of the portfolio rather than 2.5% of the entire amount. This allows the asset to be preserved, while fulfilling the zakat obligation as Divinely legislated.
Shaykh Mashad’s legal thinking is based on the Usuli principle of ghalbat al-ashbāh wherein one item fluctuates between two principles. In this case, the invested money can either be considered cash in one’s complete ownership, or a fixed asset like the land found in traditional, inherited Islamic law. The fatwa argues that the retirement money resembles the fixed asset more and therefore allows zakat to be paid on 10% of the return of the portfolio, thus preserving the retirement fund and at the same time fulfilling the obligation of zakat. As mentioned earlier, this is now the standard position of Egypt’s National Fatwa Office.
*A note with regards to ROTH IRA retirement funds. The after-tax money that is invested in the ROTH account is untouchable for the first five years, and therefore during this time there would be no zakat due on the account since you lack complete ownership. However, after the initial five years, the entire fund is within one’s complete ownership and since this comes from after tax money and is largely self-directed, normal 2.5% zakat would be owed on the entire fund.
Paying Zakat on Women’s Jewelry
Another reoccurring question is whether zakat is owed on women’s gold and silver jewelry or not. The reality is that this is not an agreed upon position in Islamic law. The Hanafis consider this jewelry zakatable, while the Shafi’s do not. Regardless of the legal reasoning behind these differing opinions (not the focus of this article), the issue is one of legitimate legal difference (ikhtilāf). This teaches us not all issues are singular and we are blessed with a plurality of opinions, all concurrently valid and legitimate. During such a situation we are reminded of the legal maxim, “when one is confronted with a situation in which there is a legitimate difference of opinion, one is allowed to follow the opinion that allows.” The Shafi’s allow women to possess gold and silver jewelry without having to pay zakat on them. Therefore, it is permissible for someone to follow this opinion. If someone, however, comes from a background that is dominated by the Hanafi position and they are used to paying zakat on jewelry, there is of course nothing wrong with continuing this practice as it is in the poor’s best interested; taking more zakat money allows for greater distribution. The point being that there is not simply one opinion regarding zakat on women’s jewelry and women should be given the option to choose the opinion that is most compatible with their situation and lifestyle.
Giving zakat money to Islamic institutions.
In the Quran 9:60, Allah lays out the eight categories to whom zakat is payable. One of these categories, fī sabīl Allah (in the cause of Allah), allows zakat money to be given to those fighting a legitimate armed conflict against those attacking the Muslims. Legitimate armed conflict, i.e. a legitimate jihad, means that the a duly constituted nation/government has formally declared war against another nation/government to defend its sovereignty. There are other factors to define a legitimate jihad in Islamic law and I will suffice with this brief description so as not to leave the reader under false assumptions. The reason this is one of the recipient categories of zakat distribution is because it is not always a given that a particular nation/government has a professional army. Therefore, at times of emergency, it is necessary to equip troops quickly to defend the state, hence the use of zakat money.
The phrasing of fī sabīl Allah is universally understood by Quranic exegetes as a reference to jihad. The issue, however, is whether jihad can only be defined as armed conflict or can there be other forms of jihad as well. In his Quranic commentary, Imam al-Rāzī provides evidence for both, quoting al-Qaffāl who argued that fi sabīl Allah can be both armed conflict and through speech (al-lisān) and other means.
This argument is important in the modern world as it is used commonly to justify the giving of zakat money to support Islamic institutions and mosques amongst Muslim minority populations. While there is no doubt that this is a legitimate reading of the Quranic text and there is solid evidence that the salaf understood that jihad is not simply ‘by the sword,’ we should be extremely cautious in adopting this position for one critical reason. The Prophet (Allah bless him and give him peace) told us that zakat is monies taken from the wealthy and distributed to the poor. That is to say, he put the primary focus of zakat the betterment of people in need, not necessarily the building of brick and mortar. For institutions to be recipients of zakat money, and for them to qualify as fī sabīl Allah, they must provide a service so essential that without it there would be a potential existential threat to the wider community. I do not mean to sound dramatic, but simply to underscore the Sharia burden that needs to be established. There are indeed certain institutions we need, however the way this opinion is currently applied lends one to believe that there is in fact no universal accepted criteria. This is easily abused, and we must take care not to squander the trust that Allah has given us.
Conclusion
While this short article addresses the three aforementioned zakat related topics, I also want to address how some of these issues are misused and applied to modern zakat calculators. My first two conclusions, therefore, will summarize the impact of the first two topics vis-à-vis online zakat calculators, while my third conclusion will more generally address the topic of supporting Islamic institutions through zakat donations.
First, there are several “zakat calculators” on the market; some by our most respectable Islamic institutions in the West. Most, if not all of them, make the user list their retirement fund as part of the zakat calculation. This is a mistake, as demonstrated above, and needs to be corrected as soon as possible. The distinction between pre-retirement and post retirement also needs to be taken into consideration as well as the fatwa of Shaykh ‘Abdallah Mashad, now standardized by Egypt’s National Fatwa Office. This fatwa continues to be a legitimate option for people to follow. Accordingly, these calculators need to be more accurate in linking Sharī‘a principles and rulings to modern applications. As we are reminded from the discipline of Usul al-Fiqh, “issuing a ruling on a matter is a function of first conceptualizing the matter in its entirety: ḥukm al-shay’ far‘un ‘an taṣawwurihī”
Secondly, Zakat on jewelry is not agreed upon in Islamic law and women should not be forced into one opinion. Rather, these calculators need to make this an option rather than a forgone conclusion.
Lastly, there is indeed room for supporting Islamic institutions through zakat funds in our traditional, inherited fiqh. To say that this is a modern reformist influenced position is incorrect. At the same time, however, it is an opinion that is continually abused, thus circumventing the essential philosophy of zakat which, as the Prophet (Allah bless him and give him peace) said, “to take money from our wealthy and distributed it to our poor.” Therefore, not every single Islamic center or organization actually qualifies and therefore a standard and criteria should be established to make this matter more focused and accurate.