Do I Have To Pay Zakat On Money Saved For Retirement?
If you meet the nisab, zakat on assets is due on all assets that are not in personal use at the rate of 2.5% per year. This includes all property and savings, including retirement savings. 2.5% zakat per year is not a whole lot. It takes over 600 years to burn a hypothetical amount of $100,000 at the rate of 2.5% per year. Even with that, no zakat is due if we fall below nisab so in essence the hypothetical amount of $100,000 can never become $0 just by paying zakat.
Also please note that if the retirement savings are invested in a 401-k or a similar plan, then no zakat is due on it on a yearly basis. Zakat on this amount is paid upon withdrawal. Please see: Discussion 48741 • Reply 48756
Suppose a person does not want to invest in stocks or have the means- Why should he be forced to work longer because of the zakat burden or or have more of his wealth depleted simply because he does not want to do the financial and legal gymnastics of the extremely wealthy Muslims who find ways to justify avoiding paying 2.5% on all of their assets? This burdens those who lack information and access to financial services as well as those with less resources and thus makes these types of rulings questionable and not practical. Getting too into the weeds we miss the more essential principles of Islam. There should not be a distinction between cash and stocks or other fancy financial instruments- a person should also not be incentivized to participate in what is a more risky endeavor, the financial system, than keep cash for the future of his family. In the modern day and financial strategies, this type of reasoning may actually incentivize more risky investments – people will feel their stocks must return 2.5% just to pay for the zakat on their assets and this is in fact more, as this 2.5% is needed as an after tax earning, so some may need to actually achieve 3-5% earning depending on the type of gain just to pay zakat. So now people cannot simply be content with relatively safe investments, protecting their families healthcare, education and housing but need to enter into more risky investments which not only risk their basis but then risk their future ability to pay zakat and help others in addition to their family. Things should be made easier for those who work their whole life to save, and not just for wealthy elites. Furthermore we should encourage safety not risk- if our zakat reasoning encourages risk I would argue it is not in the correct direction.