Zakat on Pensions, 401(k), IRA, ISA and Mortgages

Muslims in the UK, the US, Canada and Australia hold much of their wealth in accounts that classical books never discussed: workplace pensions, SIPPs, 401(k)s, IRAs, RRSPs, superannuation and ISAs. Many also carry a mortgage that is larger than all their savings. This guide sets out how scholars apply the rules of zakat to them, so you can follow the view of the scholar you trust and enter the right figures in the calculator.

The principle: is it fully yours, and can you reach it?

Zakat is due on wealth you own completely (milk tamm) and can use. Classical scholars applied this to money held by someone else: a debt owed by a willing payer is counted, while wealth that is lost, seized or out of reach is not, or is counted only when it comes back (al-Kasani, Bada’i al-Sana’i; Ibn Qudamah, al-Mughni). A pension sits between the two. The money is invested in your name, but the law stops you taking it before a set age, or lets you take it only with a penalty. That is why contemporary scholars reach different answers, much as they do for the provident fund and GP fund in Pakistan.

Defined benefit (final salary) pensions

A defined benefit pension, such as an NHS, teachers’ or civil service pension in the UK or a traditional employer pension in the US, promises you an income later. There is no pot that belongs to you today, only a promise. Scholars broadly agree that no zakat is due on it until the payments reach you; once received, money you still hold on your zakat date is counted with your other savings. A tax-free lump sum is counted once you receive it.

Defined contribution pensions: the three views

A defined contribution pension is a pot of investments in your name: a UK workplace pension or SIPP, a US 401(k), 403(b) or IRA, a Canadian RRSP or an Australian super fund. The views are:

1. No zakat until you can access it. Before the minimum pension age (55 in the UK, rising to 57 in 2028; 59½ for a US 401(k) or IRA), you cannot take the money out, or only at a heavy cost. Many scholars, including many South Asian Hanafi muftis reasoning as Mufti Muhammad Shafi did for the provident fund, say it is not yet fully yours, so nothing is due until you can draw it. Some of them then ask for one year’s zakat when it is received; others count it from then on like any other savings.
2. Zakat every year on what you could withdraw today. Many North American scholars and zakat organisations point out that a 401(k) or IRA can in fact be cashed in early, with a 10% penalty and income tax. On this view you count each year the amount you would actually receive if you withdrew it now, after the penalty and tax.
3. Zakat on the zakatable part of the investments. Some scholars, using the same method as for long-term shares, count only the part of the fund that is cash, bonds or the companies’ own zakatable assets (cash, receivables, stock), not their buildings and machinery. This usually gives a much smaller figure; see zakat on shares and funds.

Once you reach pension age and can draw the pot freely, the main reason for the first view falls away, and most scholars then count the value you could take (after tax) each year.

Worked example: a 401(k) at age 40

Yusuf lives in Texas and has $100,000 in his 401(k) and $20,000 in his checking account. If he cashed in the 401(k) today he would pay a 10% penalty ($10,000) and, say, 22% federal income tax ($22,000), leaving $68,000 (figures are only for the example).

• View 1: he counts only the $20,000 in his checking account. Zakat: $500 if that is above the nisab, about $1,074 by silver today.
• View 2: $20,000 + $68,000 = $88,000. Zakat: $2,200.
• View 3: $20,000 plus the zakatable part of the funds inside the 401(k), which depends on what they hold.

Worked example: a UK workplace pension and SIPP

Ayesha is 38 and lives in Birmingham. She has £45,000 in a workplace pension and a SIPP, £8,000 in a cash ISA and £3,000 in her current account. She cannot touch the pensions until 57. On view 1 she counts £11,000 and pays £275. If her scholar follows view 2, she can only use the value she could actually get, and as UK pensions cannot be cashed in before pension age at all (except in rare cases such as serious ill health), many who hold view 2 for a 401(k) still apply view 1 to UK pensions.

ISAs and other savings accounts

• Cash ISA: the same as a bank balance. Count the whole balance. Interest on a conventional cash ISA is a separate question; many scholars ask you to give it away without intending reward, and not to count it as your wealth.
• Stocks and shares ISA: the ISA is only a tax wrapper. Count the shares and funds inside it as you would anywhere else (market value if held to sell; the zakatable part, or the market value to be cautious, if held long term); see zakat on shares.
• Lifetime ISA: you can withdraw early, but with a 25% charge. Count what you would receive after the charge, or the full value to be cautious.
• Junior ISA and children’s accounts: the money belongs to the child. In the Hanafi madhab there is no zakat on a child’s wealth; in the Shafi’i, Maliki, Hanbali and Ahl-e-Hadith views the guardian pays it from the child’s money each year.
• Roth IRA: your own contributions (not the growth) can be withdrawn at any time without penalty or tax, so most scholars count at least the contributions every year.
• US 529 and education accounts: money you can take back is yours; ask your scholar how to treat the penalty on withdrawals not used for education.

Mortgages, car finance and student loans

Debts reduce zakat in the Hanafi, Maliki and Hanbali schools, and not in the Shafi’i school (and our Ahl-e-Hadith setting). But a 25-year mortgage is different from a debt you must repay now. If the whole mortgage were deducted, most homeowners in the West would never pay zakat, even with large savings, which scholars do not accept.

• The common contemporary view: deduct only the instalments falling due in the next 12 months (or, for some scholars, only those due on your zakat date), not the whole outstanding loan. Mufti Muhammad Taqi Usmani gives this view for long-term debts, and it is widely followed in the UK and North America. In the calculator, open Debts / Bills and enter 12 months of mortgage payments under Instalments due in the next 12 months.
• Maliki: the classical Maliki rule first sets a debt against wealth that carries no zakat beyond your needs (such as a second car or a second property you live in), and only the rest reduces your zakat.
• Shafi’i and Ahl-e-Hadith settings: no debt is deducted, so the mortgage makes no difference.
• Car finance and personal loans: the same as a mortgage: the next 12 months’ payments.
• UK student loans: you repay only from income above a threshold, and the rest is written off. Many scholars therefore deduct nothing, or only what will actually be taken from your salary in the coming year.
• Credit cards and bills due now: deduct in full where your madhab deducts debts.

Whether a conventional mortgage is permissible in the first place is a separate question on which scholars also differ; this guide only deals with its effect on zakat.

How to enter it in the calculator

1. Choose your madhab and your currency (GBP, USD, CAD, AUD and the rest are all there).
2. Put bank accounts and cash ISAs under Bank.
3. Put shares, stocks and shares ISAs, and any pension you count (the amount your scholar’s view gives) under Shares.
4. Under Debts / Bills, enter credit cards and bills due now, and the next 12 months of mortgage and car payments under Instalments.
5. Add gold and anything else you own. The calculator compares the total with the nisab and shows each madhab side by side.

Living abroad with savings in Pakistan too? See zakat for overseas Pakistanis, and for paying it, giving zakat abroad and through charities.

This guide is general information, not a fatwa. Pension rules change, and so do your own circumstances; for large sums, ask a qualified scholar.

Frequently asked questions