7/5/2013 11:44:48 AM
Calculating Zakah for charitable giving can be complicated, depending on the type of assets you own. Below are some FAQs concerning Zakah on retirement assets that may help you:
Q: Do I have to pay Zakah on money in my IRAs?
A: This is a common question that we receive. While there are varying opinions, the majority of scholars agree that Zakah is only due on money you can readily access. In regards to qualified retirement accounts, it depends on the type of account you have and whether you can withdraw from it. IRAs of all types (including Traditional, Roth, SEP, and SIMPLE) allow you to take a distribution. However, if you are below the age of 59.5 or do not meet any hardship requirements, you may owe a penalty and income taxes. Because you can withdraw from an IRA, you owe Zakah only on the balance after any applicable taxes and penalties.
Q: I am an employer and am the trustee of the retirement plan. Do I have to pay Zakah on my account?
A: Because you are the employer and trustee of the retirement plan, you have the power to terminate the plan at any time and access the money. In this case, the majority opinion would be that ZAkah is owed on the money in your account.
Q: I am an employee and have a 401(k)/403(b) plan through my employer. Do I have to pay Zakah on it?
A: If you are an employee and do not meet any of the requirements to take a distribution (such as reaching age 55, disability or other hardship withdrawal) then you do not have access to your money. The same rule applies if your employer has made contributions for you to a pension plan, defined benefit plan or profit sharing plan. Some plans may allow participants to take loans from their 401(k), but this would not qualify the money to be Zakatable. In this case, the majority of scholars would be of the opinion that Zakah is not owed on these assets since the owner cannot currently access these funds (unless, of course, the owner were to terminate their employment).
Q: I have limited options on how I can invest my 401(k) through my employer. My current portfolio has investments in bonds and other companies that do not pass Islamic screens. Do I owe Zakah on this?
A: Zakah is owed only on lawful assets. For interest-based debt securities, Zakah is owed on the principal amount or market value only, whichever is lower. This includes bonds, banking notes, CDs, commercial paper, and money market funds. However, any gain due to accrued interest or market appreciation is not recognized as lawful and is not eligible for Zakah. Since all conventional bonds generate revenue from interest and some stocks may generate revenue from impure sources (such as a prohibited line of business or interest-based transactions) income or gains from these impure assets are not Zakatable. Instead, these gains should be avoided and even insignificant amounts should be ‘purified’ by distributing the gain to charity.
Unlike Zakah, purification does not qualify as Zakah or Sadaqah (non-Zakah charitable giving) in regards to spiritual reward. The purpose of donating the money is to "cleanse" oneself of it since the intent was never to benefit from unlawful assets. Talk to us about how you can add the Azzad Funds as Halal mutual fund options to your 401(k).
And God knows best.
Call us at 1.888.86.AZZAD or email us for more information about our Zakah and Purification Calculation Guidelines.
The above is intended for informational purposes only. Please consult with your religious scholar regarding religious opinions and edicts.
Opinions expressed are those of the author or fund manager, are subject to change, are not guaranteed and should not be considered recommendations to buy or sell any security and should not be considered investment advice.
Fund holdings and sector allocations are subject to change and are not a recommendation to buy or sell any security. Click here for Azzad Ethical Fund current top 10 holdings. Click here for the Azzad Wise Capital Fund current top 10 holdings.
Past performance does not guarantee future results.
The Azzad Ethical Fund is non-diversified and may invest a larger percentage of its assets in fewer companies exposing it to more volatility and/or market risk than diversified funds. The Fund may not achieve its objective and/or could lose money on your investment in the Fund. Stock markets and investments in individual stocks can decline significantly in response to issuer, market, economic, political, regulatory, geographical, and other conditions. Investments in mid-cap companies can be more volatile than investments in larger companies. Investments in growth companies can be more sensitive to the company’s earnings and more volatile than the stock market in general. Because the portfolio may invest substantial amount of its asset in issuers located in a single country or in a limited number of countries, it may be more volatile that a portfolio that is more geographically diversified. See the prospectus for more details about risks.
Investments in smaller and medium sized companies involve additional risks such as limited liquidity and greater volatility. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Investments in lower rated and non-rated securities present a great risk of loss to principal and interest than higher rated securities.
The Azzad Wise Capital Fund is non-diversified with a high concentration of securities in the financial sector which can expose the Fund to more volatility and/or market risk than diversified funds. The Fund may not achieve its objective and/or could lose money on your investment in the Fund. The Fund mainly invests in securities issues by foreign entities which expose the Fund to country specific risks such as market, economic, political, regulatory, geographical, and other risks. The Fund intends to invest in certain instruments that may be illiquid. As a result, if the Fund receives large amount of redemptions, the Fund may be forced to sell such illiquid investments at a significant loss to be able to meet such redemption requests. See the prospectus for more details about risks.