There are several opinions regarding this issue, all assuming that this money has reached the Zakat threshold (nisab):
The first opinion is that there is no Zakat on these types of funds because one of the conditions for paying Zakat is that the money is in the possession of the owner, and according to this opinion, these funds are considered to be partially owned and restricted.
Therefore, according to this opinion, Zakat is not due on these funds until they are withdrawn, and after they have been held for a full lunar year.
The second opinion is similar to the first, except that Zakat is paid on these funds immediately upon receipt, based on the previous year’s ownership, as it is established in their view that the owner had complete ownership of the funds in the previous year before receiving them.
In both opinions, the Zakat payer would pay 2.5% of the total amount of money that has reached the nisab.
The third opinion is that Zakat is obligatory on these funds if they reach the nisab in each lunar year.
The proponents of this opinion suggest that the owner of the funds should calculate the amount of money he has saved in his retirement account and assume that he withdrew that money on the day of Zakat payment. He should then deduct any taxes or penalties from that amount, and add the remaining amount to his other wealth. Zakat should then be paid on the total amount if it reaches the nisab. This should be done annually.
The fourth opinion was adopted by scholars such as Muhammad Abu Zahra, Abdul Wahhab Khalaf, Abdul Rahman Hassan, Sheikh Yusuf al-Qaradawi, and others, and this what we issue our fatwa upon.
According to this opinion, retirement funds are similar to public funds in some aspects, but they differ in others. They are owned conditionally and are considered as endowment funds, whose benefits are only realized upon the expiration of the specified period. Therefore, it is not appropriate to treat them as accumulated or acquired wealth. Nevertheless, it is considered a form of preservation and accumulation for the future, and due to its endowment nature and conditions, it generates income. Therefore, the aforementioned scholars exerted their efforts (ijtihad) and associated this type of fund with similar forms of purification (Zakat) due to its resemblance to agricultural land, which is not sold itself but generates crops through its cultivation while remaining the property of its owner.
These scholars ruled that this type of fund is subject to Zakat similar to that of agricultural land. However, in this case, Zakat is not paid on the principal amount but rather on the gains or income generated from it. If we assume that a person has $10,000 in their retirement account, and their cycle begins from one Ramadan to the next, and during the new Ramadan, they gained $1,000, according to this opinion, they would deduct the administrative expenses (overhead expenses) from the $1000, and then pay Zakat at a rate of 10% on the remaining amount, which is considered as Zakat on the yield. If we assume that they did not earn anything, then they would not be required to pay anything. And so on. If the cycle of the retirement account is from January to January, then the payment would be 10.03% because the solar year is longer than the lunar year.
This opinion is the one that we lean towards and choose for issuing the fatwa.
And Allah knows best.
Fatwa by Dr. Khālid Naṣr