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The 401(k) Zakat Shelter

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One of the primary objectives of Islam is the development, preservation, and equitable distribution of wealth in society, and Zakat is the main vehicle for social and economic justice. Charitable giving is considered a proof of faith and withholding charity considered as a serious offense. Thus, when Abu BakrraḍyAllāhu 'anhu (may Allāh be pleased with him) became the Khalifa, and some tribes withheld paying Zakat, he emphatically stated, “I swear by Allah if they withheld only the [amount in Zakat] of the reins of a camel of what they used to give to the Prophet, I would fight them for it.” While the early generations realized the importance of Zakat, it has, unfortunately, become the least understood of all the pillars of Islam.

Last Ramadan we wrote about the problem of non-profits abusing Zakat. Even more potentially damaging is when people don’t properly pay their Zakat at all. Poorly reasoned opinions on Zakat can lead to hundreds of millions of dollars that are not going to those in need. There are many topics related to Zakat that need clarification, but we will focus on one particular issue, the 401(k). The 401(k) is how Americans tend to hold their wealth. The average 401(k) has roughly $100,000.00 while a typical savings account has less than $1,000.

While there are several legal opinions on the 401(k), it is relatively common for Muslims to be told the 401(k) is exempt, at least until the age of 59 ½. The rationale is that individuals do not have full ownership of the 401(k) as it cannot be withdrawn until the age of 59 1/2 because it is subject to taxation and an “early withdrawal” penalty, which somehow makes the asset illiquid. This view creates a massive Zakat shelter that perpetuates inequity and treats people with similar assets differently for seemingly no good reason.

Let’s illustrate why with the following examples:

Musa has $2,000,000 in gold stock (this is an exchange-traded fund that owns gold), a home worth $700,000, and $20,000 in cash savings. He wants to pay Zakat, so he consults a Shaykh about his situation. The Shaykh tells him he needs to pay Zakat on $2,020,000, or $50,500 (2.5% of $2,020,000). The Shaykh explains that one’s home is exempt.

Musa’s twin brother, Haroon, also has $2,000,000 in gold stock, an identical home next door worth $700,000, and $20,000 in cash savings. He asks the same Shaykh how much he should pay in Zakat. The Shaykh tells him his home is exempt and he does not need to pay any Zakat on his gold stock. Therefore, he only needs to pay Zakat on the $20,000, which would mean he pays $500 (2.5% of 20,000).

Why the difference? Haroon’s gold stock is in a self-directed 401(k), while Musa’s gold stock is in a regular brokerage account. Haroon’s 401(k) is subject to ordinary income taxes upon withdrawal, in addition to a 10% early withdrawal penalty. However, Musa can sell his gold and be subject to a 28% maximum federal tax rate on the capital gain of the stock. Both Musa and Haroon voluntarily choose how they would own these assets.

Both are subject to taxation upon withdrawal. However, only Haroon is subject to the 10% penalty and ordinary income taxes for all the gold stock he owns. So, for Shuyukh who take the view that the 401(k) is exempt from Zakat for those under 59 ½, Haroon should not have to pay anything on the gold stock.

Same Asset, Different Wrapper

To show why Musa and Haroon should not be treated differently, let’s go over some basics of zakat, though this short article cannot be a comprehensive treatment of the subject:

A prerequisite of paying Zakat is possessing the nisab (threshold of possessing surplus wealth) and the passage of the hawl (lunar year). So, if you don’t have enough money over the duration of the lunar year, you don’t pay zakat. You don’t pay zakat on exempt assets, you partially pay on business assets, and you pay the full 2.5% on assets that are fully “zakatable.” Note though other rates apply for agriculture and livestock.

Retirement plans like 401(k)s are not assets in and of themselves, capable of being sorted in the flow chart above. They are “wrappers” for almost any asset providing tax treatment that is different from assets in other “wrappers.” The tax treatment can be considered either better or worse depending on your perspective. Roth IRAs and Roth 401(k)s come from post-tax dollars and are treated differently. However, Microsoft common stock owned in a retirement 401(k) account and Microsoft common stock in other types of accounts are the same, you get the same rights of ownership, such as a dividend (if it is paid) and voting rights.

Voluntary Financial Choices and Landing the Right Job

When you open a 401(k), you are voluntarily participating in an employee benefits program by taking pre-tax dollars from your paycheck and depositing it into an investment account. This money can be invested in your company’s stock, a menu of mutual funds, or perhaps a brokerage option where you can invest in almost anything available for sale in an online brokerage. There are other wrappers for the same assets, such as irrevocable trusts, non-qualified plans, captive insurance companies, limited partnerships, LLCs and other vehicles. A 401(k), as well as other Employment Retirement Income Security Act (ERISA) Qualified Plans also offer asset protection benefits to those who have them. Additionally, your employer may match your contributions up to a certain percentage, essentially giving you free money as a reward for saving.

Let’s take the case of Aisha and her twin sister, Fatima. Aisha works at a corporation that offers her a 401(k) that matches at the rate of 5% and her annual income is $150,000. If she invested $7,500 of her money, her employer would add $7,500 as well (5% of 150,000). Aisha would have $15,000 in her 401(k) account after one year.

Aisha’s twin sister Fatima works at another company that does not offer her a 401(k), and she has an annual salary of $50,000. She saved $10,000 of her money that year. While they both have savings and assuming a lunar year has passed, Aisha was fortunate to deposit pre-tax income into her retirement account, and her employer matched her contribution. Fatima had to save her post-tax money without any help from her employer.

A Zakat rule exempting 401(k) assets while imposing Zakat on other savings penalizes Fatima for not landing a job at a company that offers a 401(k) with matching as part of its benefits package. Such inequity seems arbitrary and unjust on its face.

Does a 10% penalty make something “illiquid”?

The claim that something is illiquid or inaccessible because it is subject to ordinary income taxes and a 10% penalty also appears to be a weak reason to exempt assets from Zakat on another count: The term “subject to taxation” does not mean it will be taxed.  The 401(k) is more complicated than merely a 10% penalty (which generally applies to similar plans), since there may be the ability to borrow from an account you do not close down.  Though this should normally not be necessary.

To illustrate, let’s add some facts to our first example. Say Haroon, who has his gold stock in a 401(k), is about to have losses for the year in a failed business. He does not know this will happen when he pays Zakat. His losses would wash out any penalties and taxes he may pay on his 401(k) if he decides to withdraw it. Musa will have a great year and would pay the full 28% capital gains tax on his gold if he sold it. Gold has a higher capital gains rate than other kinds of assets. So in this example if we follow the 401(k) is exempt from Zakat view, Haroon’s wealth is regarded as “illiquid” because he is subject to taxes he legally does not pay. While Musa has to pay taxes, but his gold is (properly) considered fully “zakatable” because his assets are somehow considered more liquid. Moreover, when the time comes to calculate Zakat, there is a realistic possibility that neither Musa nor Haroon will have any idea what tax bracket they will fall in, if they will make or lose money, what specific exemptions they will have and so forth. They may have some idea, but they don’t truly know the future.

The practice of making sweeping judgments on qualified plans based on their potential tax treatment serves to create a contrived Zakat shelter. Taxation, as taxpayers know, is subject to variables such as income, brackets, exemptions, exceptions, deductions, and credits. Furthermore, a flood of regulations, memoranda, and court opinions add to or modify tax rules regularly. The very wealthy, because tax laws tend to be written to favor them, often pay little to no taxes in comparison to their resources while the middle class often pay far more.

Does a 10% Penalty mean your money is not liquid?

As to the 10% early withdrawal penalty that evidently makes the asset inaccessible, according to some Shuyukh, the government is far more flexible than many realize. If you know you are going to withdraw a similar amount every year, for example, you can make the withdrawal without any penalty according to the tax code.

Does this mean the answer is clear and that you should treat the entire 401(k) plan the same as cash? Well, not really as there may be more to it. For example, some assets in a 401(k) may not be “vested,” which is to say not yet owned, and therefore exempt from Zakat. In the case of the 401(k), we share the opinion of reputable scholars, that all vested assets in a 401(k) are “zakatable”, regardless of which “wrapper” the asset is in (e.g., through a personal business, corporation, etc.). We leave aside for now the issue of calculating Zakat for the underlying assets inside a 401(k), particularly common stocks. This can be addressed separately.

If we are not careful in getting our zakat calculations correct, we will end up excluding what may be billions of dollars of wealth American Muslims possess from Zakat. The sad fact is, the current crop of articles, seminars, and overly-simplistic zakat calculators do not do justice to this pillar of Islam.

In General, knowledge of Zakat in the United States is woefully underdeveloped, providing opportunities for the proliferation of views exempting payment for dubious reasons. Islamic Scholars would serve the Muslim community best by developing appropriate uniform standards on payment of Zakat that both understands the realities of how Americans hold wealth as well as the rights of those entitled to Zakat.

Osman Umarji was born and raised in Southern California. After spending years working as an engineer, he left his career to pursue an Islamic education at Al-Azhar University, specializing in Islamic law and legal theory. He  previously served as an Imam and has spent years studying Zakah and has given numerous seminars on the topic. He is currently pursuing a PhD at UC Irvine in Educational Psychology, while also serving the community as an educational consultant

 

Ahmed Shaikh is a Southern California Attorney. He writes about inheritance, nonprofits and other legal issues affecting Muslims in the United States. He is the co-author of "Estate Planning for the Muslim Client," published by the American Bar Association. His Islamic Inheritance website is www.islamicinheritance.com

32 Comments

32 Comments

  1. Avatar

    abdul razzaq

    June 22, 2017 at 2:02 PM

    sorry I disagree. lets take your $100,000 in the average 401k. zakat would be $2500. more than the $1000 average people have in savings.

    so to pay the zakat of $2500 you would need to take out almost $5k so you could cover ordinary income tax and a 10% penalty.

    if anything the real zakat on a 401k 100k should be $100k -40% * 2.5%, leaving someone with $1500 zakat due and still not enough liquid assets to pay.

    • Avatar

      Ahmed Shaikh

      June 22, 2017 at 2:38 PM

      Thank you for your comments. 1) It may be that you need to pay $2,500 in Zakat if you invested in gold, but we did not address how Zakat is calculated on all conceivable assets inside a 401(k).

      2) The notion that 401(k) funds must be withdrawn in order to pay Zakat is interesting. This assumes there is no, or almost no other income throughout the year (which can be used to pay Zakat), in which case the money should likely be withdrawn free of penalties and income tax.

      • Avatar

        Teepu

        June 26, 2017 at 11:37 AM

        TIAA CREF? Where does that fall ?

    • Avatar

      Fahd A

      June 22, 2017 at 6:06 PM

      Br. Ahmad raises the critical point: no where in zakat owed calculus seems to be a barrier of liquid or illiquid assets. If a Muslim owns a second home that they don’t use personally, most of us will probably agree this would be zakatable. Then we wouldn’t quibble over the fact that they would have to sell a few bricks or a wall to pay zakat on it :-) I understand Br. Abdul Razzaq’s point, that if Allah blesses you with enough wealth and ability to save into a 401(k), you may find it increasingly hard as years go by to pay the zakat out of your regular income. In hard years, you may have no choice but to liquidate some savings to fulfill your zakat obligation. But illiquidity (vs. sheer control over the asset such as non-vested portions) does not seem to be a valid reason to exclude assets, as this article explains with clear logic.

      I am no imam but in my readings on this topic I have seen mentions of deferring zakat on certain kinds of assets and paying the accumulated sum later. Perhaps the authors can elaborate on our options, if any, when we have illiquid zakatable wealth of some sort, due to the inherent nature of the asset (e.g., real estate) combined with income hardship.

      • Avatar

        Mohamed Soumakieh

        July 2, 2017 at 12:26 PM

        If you own a second home usually u have plans for it such as selling that house for a profit or you may rent that house and make money which in both cases u will have the mean to pay zakat. So this is different from 401k scenario

  2. Avatar

    K S

    June 22, 2017 at 2:21 PM

    i agree with the commentor. If an average person who does not have much saved was to pull out 401K money every year their funds would be severely depleted for retirement since pulling out money will increase your taxable income too. You have to be careful and be keen to pay zakat properly

    • Avatar

      Yousif

      June 22, 2017 at 4:30 PM

      Correct me if I’m wrong, but what Ahmed is trying to say is you don’t have to pull money out of your 401k to pay Zakah. If you meet the “nisab” as he mentioned then you would calculate the Zakah on the 401K, but actually pull the Zakah out of your other sources of income.

      • Avatar

        Ahmed Shaikh

        June 22, 2017 at 6:12 PM

        It would be advisable. Of course, coming up with the money to pay Zakat is not always easy, even if you don’t have a qualified plan.

  3. Avatar

    Yousif

    June 22, 2017 at 4:23 PM

    Subhan Allah! your last comment nailed it!

    “… and overly-simplistic zakat calculators do not do justice to this pillar of Islam.”

    Is there a book you would recommend a layman or student of knowledge to read so that they are more familiar with Zakah in its entirety?

    • Avatar

      Osman Umarji

      June 27, 2017 at 4:43 PM

      Sheikh al-Qaradawi’s book on Zakat is quite comprehensive and useful. It has been translated.

  4. Avatar

    AU

    June 22, 2017 at 5:05 PM

    Salam

    What happens in countries where you have no control at all of your 401k. Meaning there’s no way you can take out before the age of 60. There’s no option of hardship withdrawal or any exceptions. On top of that, it’s mandated on employers to pay to retirement funds and the individual does not have to pay to get matching (like in US). How should we treat that case?

    • Avatar

      Osman Umarji

      June 22, 2017 at 5:59 PM

      In the case you mentioned, there would be no zakat due on that asset because there is no ownership. I doubt it would be classified as a 401(k), as it is specific to US tax code.

  5. Avatar

    Osman Umarji

    June 22, 2017 at 6:10 PM

    I just want to point out that our opinion is not a new opinion on the topic. This article was not intended to be a full legal analysis of the issue. Many other reputable scholars from various traditions hold the same opinion. See the links below:

    http://www.zamzamacademy.com/2010/08/permissibility-of-and-zakat-on-401k-plans-other-securities/

    http://seekershub.org/ans-blog/2013/05/21/zakat on-401kretirement-plans/

    http://www.calislamic.com/2017/06/17/zakah-401k/

  6. Avatar

    Frank C

    June 22, 2017 at 6:51 PM

    There are too many assumptions in this article. A company’s contribution is technically “free money”, but you don’t have access to it until the age of 59-1/2. Secondly, the average American is living paycheck to paycheck. What happens when the amount you owe on your 401k is greater than you have in the bank? Do you take out a loan each year to pay zakat on wealth you don’t even have direct access to? This will cause greater debt. The loan you take out will have high interest payments. It doesn’t make any logical sense.

    Take this example:

    Rashid promises his 18 year old son, Kareem that he will give him $100,000 on his 28th birthday, but if Kareem ever needs money in the mean time, he can borrow from him, but will need to pay it back. Does Kareem pay zakat each year on money he doesn’t have yet or pay it once he receives it? The logical response is to pay it once he receives it. Taking a loan from your 401k is essentially the same thing, except that you also have taxes AND interest payments.

  7. Avatar

    Ahmad

    June 23, 2017 at 2:25 AM

    This doesn’t make any sense and is not practical at all. As time goes on the 401k continue to increase each year more and more “zakat” is due.

    lets assume a 401k will earn 10% year on year. Someone makes 100k, after taxes, 5% contribution to the 401k, medical plan, rental, food, bills, car etc actual cash for saving is $4k. I’ve only factored basic needs shelter, food, transportation (two cars) for a typical North american family etc.

    Granted you haven’t spoken about how to pay for it, i’ve assumed 2.5% but how will this person afford to pay, by 25 years the zakat you speak of that would be owned by this is $35k

    1 $100,000 $2,500
    2 $115,000 $2,875
    3 $131,500 $3,288
    .
    .
    .
    25 $1,427,460 $35,686
    26 $1,575,206 $39,380
    27 $1,737,726 $43,443
    28 $1,916,499 $47,912
    29 $2,113,149 $52,829
    30 $2,329,464 $58,237

  8. Avatar

    Omaran

    June 23, 2017 at 4:18 AM

    Thank you for bringing this important and relevant issue for us Muslims living in the US. There are several fatawa regarding this issue and not all of them exempt 401k money as you seem to suggest. The method of calculation is to subtract the taxes due and the penalties and then pay 2.5% on the balance.

  9. Avatar

    Ali

    June 23, 2017 at 10:08 AM

    Is it your opinion that the payment of zakat is due immediately? Many of the opinions I’ve heard on this matter is that while zakat may be owed and should be calculated, it need not be distributed until you begin taking distributions from the 401k. This is more rational for a number of reasons mentioned by other commenters, plus it gives clarity to what your income tax rate (and hence liability) will be at the time of withdrawal. Every penny of zakat is eventually paid, just years later.

    What is your opinion on this approach?

    • Avatar

      Osman Umarji

      June 27, 2017 at 4:42 PM

      Here is my reply to a number of questions raised.

      1. To clarify, the opinion given in this post is not new or groundbreaking. Many reputable scholars have said the same years ago. See the following links for the opinions of Dr. Monzer Kahf, Mufti Abdurrahman Mangera, and Imam Mustafa Umar.

      http://monzer.kahf.com/fatawa/2000-2002/FATAWA_ZAKAH.pdf
      http://seekershub.org/ans-blog/2013/05/21/zakat-on-401kretirement-plans/
      http://www.calislamic.com/2017/06/17/zakah-401k/

      2. In the case where one ha 401(k) assets that are so large that one cannot pay them annually from cash on hand, here are a few choices one has. I will not comment on what one should do at the moment, perhaps that needs a separate article and analysis.
      a. Pay the taxes and penalty on what you need to withdraw in order to pay your Zakat annually.
      b. Delay payment temporarily and reduce annual contributions so one has more cash on hand to pay Zakat.
      c. Pay at the age of 59 and a half on all the previous years. This is tricky (not necessarily unlawful though) for two reasons. (1) You are essentially telling the poor to wait for decades for your wealth. (2) The number will be extremely high that will not be spiritually easy for many to pay.
      d. Pay a portion of your due Zakat with whatever cash you have on hand and pay the rest when possible.

      3. According to the fiqh of Zakat, some of the conditions of wealth being “zakatable” are if the money has the possibility of growth and one owns that wealth. The owner of the 401(k) account one is (possibly) making money on the full amount year after year and owns the fully vested amount. For example, if someone has $100,000 in a 401(k) and it grows at an average rate of 8%, they have $108,000 after 1 year. Thus, one is benefiting from the money in its entirety.

  10. Avatar

    Ashraf Gomma ali

    June 23, 2017 at 11:26 AM

    Sh Salah al Sawi is of the opinion that you the zakatable portion of the 401k or any type of “wrapper” is what you would get if you liquidate today (after taxes and penalties). This would apply generally if the assets were held for trading purposes. If they were held for Income purposes, then only the income would be zakatable. If they were held for long term trading purposes, there are two opinions: one which requires zakat annually and another which requires zakat after selling the assets. I believe the second is more fitting for 401k in case of long term investments. And Allah knows best.

  11. Avatar

    Safiya

    June 23, 2017 at 12:11 PM

    If this is the ruling, then the same ruling should apply to pensions and social security.
    Both pensions of government employees and social security in general for all citizens,has the same type of calculation as 401K.But the investment funds that the money gets allocated to and the contributor is the government.Sheikh,please confirm why pensions and social security is not zakatable before the retirement age.

  12. Avatar

    OQ

    June 24, 2017 at 9:20 AM

    Does a service oriented business have zakah on its assets like a school on its chairs, computer lab etc?

  13. Avatar

    Justin Ducote

    June 24, 2017 at 7:12 PM

    Alsalamalaykum dear brothers,

    I think there is a typo in the sentence: “Roth IRAs and 401(k) come from post-tax dollars and are treated differently.”

    401k monies would come from pre-tax (not post-tax) income, correct ?

    Or perhaps it is missing a “that” or “which” somewhere in the sentence ?

    justin

    • Avatar

      Justin Ducote

      June 24, 2017 at 9:09 PM

      After reading this article and leaving my question, I just learned today about the existence of a “roth 401k” which is derived from post tax earnings, I figure that is likely what the authors meant as in “roth IRAs and roth 401(k)s”

      • Avatar

        Ahmed Shaikh

        June 24, 2017 at 10:01 PM

        Yes, this is exactly right. I should have said “Roth IRSs and Roth 401(k)s” and this has been fixed. Thanks for the catch!

  14. Avatar

    Osman Umarji

    June 29, 2017 at 12:23 AM

    Here is my reply to a number of questions raised.

    1. To clarify, the opinion given in this post is not new or groundbreaking. Many reputable scholars have said the same years ago. See the following links for the opinions of Dr. Monzer Kahf, Mufti Abdurrahman Mangera, and Imam Mustafa Umar. You can see there opinions at seekershub or calislamic websites.
    2. In the case where one has 401(k) assets that are so large that one cannot pay them annually from cash on hand, here are a few choices one has. I will not comment on what one should do at the moment, perhaps that needs a separate article and analysis.
    a. Pay the taxes and penalty on what you need to withdraw in order to pay your Zakat annually.
    b. Delay payment temporarily and reduce annual contributions so one has more cash on hand to pay Zakat.
    c. Pay at the age of 59 and a half on all the previous years. This is tricky (not necessarily unlawful though) for two reasons. (1) You are essentially telling the poor to wait for decades for your wealth. (2) The number will be extremely high that will not be spiritually easy for many to pay.
    d. Pay a portion of your due Zakat with whatever cash you have on hand and pay the rest when possible.
    3. According to the fiqh of Zakat, some of the conditions of wealth being “zakatable” are if the money has the possibility of growth and one owns that wealth. The owner of the 401(k) account one is (possibly) making money on the full amount year after year and owns the fully vested amount. For example, if someone has $100,000 in a 401(k) and it grows at an average rate of 8%, they have $108,000 after 1 year. Thus, one is benefiting from the money in its entirety.

  15. Avatar

    Mohamed Soumakieh

    July 2, 2017 at 12:14 PM

    This is very very difficult subject. I am not convinced with any opinion out there yet!
    I think paying zakat on 401k is extremely difficult especially after 10 or 20 years. Which will make Muslims stay away from retirement plans. If they do most people will end up not saving at all as they grow older which is not only bad for them but is equally bad for the Muslim community as there is a lot less wealth to pay zakat on (this point could be a lot more important than the tax shelter idea in terms of amount of zakat lost).

  16. Avatar

    BS

    November 23, 2018 at 2:48 AM

    This is a very important issue often overlooked by many Muslims. However, the article failed to illustrate the issue with a realistic example. For instance, it could assume simplified case where an employee contributes $10,000 a year and his employer matches $5,000 that vested throughout the year uniformly. So, after 1st year there is $15,000 in the 401k plan. How much will be the due, if we assume the employee’s tax bracket is 30% and there is 10% penalty.

    Next, the first year’s contribution grew by 10% next year. So at end of 2nd year the total amount in 401k = $15,000 * 1.1 + $15,000 = $31,500. Out of this $1,500 grew as “capital gain” from the fund’s investment. How much will be the due at end of 2nd year?

    Please write a follow-up article to demonstrate such use cases. Without that I don’t know how much useful this article is. Allah knows the best!

  17. Avatar

    Omer Minhas

    May 10, 2019 at 3:36 PM

    Assalamualikum, I recently came across the following 2 videos from shaykk Yasir Qadhi regarding zakat on 401k, and wondering how the author of this article reconciles them with what he has written.

    https://www.youtube.com/watch?v=DuTr6LeoQHI 25:00 to 30:00
    https://www.youtube.com/watch?v=wDxfTL5PkHY 16:00 to 19:00

    I understand that there is an opinion that for those who do not have sufficient funds on hand to pay the zakat on 401k, can track zakat for each year and then pay it altogether at the time it is distributed on/after age of 59.5. However, what is the guarantee that one will live until that long, in which case wouldn’t it actually be a burden on that person?

  18. Avatar

    Salman Nazir

    May 12, 2019 at 5:02 PM

    Dear brothers Shaikh and Umarji, in a TIA-CREF account you are not allowed to withdraw at all unless you quit your job or retire. This means you do not have access to that money at all. So what about zakat in that scenario. Is it still applicable?

    • Avatar

      Ahmed Shaikh

      May 19, 2019 at 3:13 AM

      There is a question of calculation, which the article does not address. However, plans will often not let you withdraw. But the fact that you can withdraw if you leave your job is not the same as completely unavailable. You may consider calculating what you owe and paying through the year from other sources. Even so, say you had $10,000,000 in gold stocks in your account (you probably don’t). The article goes to point to the absurdity of taking the position that you owe no zakat at all. The article, which is three years old now, is still unsatisfying (to me anyway) and Zakat is no better developed and understood now than it was then.

  19. Avatar

    Usman

    May 19, 2019 at 2:50 AM

    This article and many like it on 401k accounts treat all assets within 401k to be similar. This is problematic. How can stocks be considered like cash or inventory? Owning a stock means I am a partial owner of a business. So I should only have to pay zakat on the inventory of that business (not on the market value of the stock). If a 401k account is all stocks (such as equity only mutual funds), then if the value of 401k is 100,000$ one can estimate the inventory on average that public companies carry per $ market value and use that to estimate the inventory one is responsible for. It seems illogical to treat ownership of a business in the same category as cash or goods for sale. Just because one can sell ownership of a business, it does not make that ownership equivalent to holding goods for sale. Stocks in 401k are long term investments (not day to day trading). Most people only cash out when they really need the money. When one really needs the money (if one did not have stock ownership) one can also sell books, clothes, car .. anything one owns can be sold in a hardship. Does that make all these things inventory and hence zakatable? All scholars say No. So why is ownership of businesses treated in this way? Also this poses a great dilemma esp in Muslim countries. Let’s say I own $100,000 worth of stock of companies in a Muslim country where all these companies pay zakat on their inventory. If I now have to pay zakat on these shares of these companies, then Zakat is being paid twice using 2 different rules for the same business. Also the value of a company (stock price) reflects current estimate of all future earnings. If one has to pay zakat based on stock price, it is like paying zakat on an estimate of all future earnings of the business. Doing this year on year would mean that business earnings get deducted for zakat numerous times. Imagine that one expects to earn 10,000$ after 10 years. Since this is part of the stock price, one would end up paying zakat on this 10,000$ earnings 10 times before it is even earned by the business. In short, there are many logical challenges in equating ownership of a business to cash or inventory, and hence paying zakat on stocks held for the long term based on stock price does not make sense.

    • Avatar

      Ahmed Shaikh

      May 19, 2019 at 3:07 AM

      Thank you for this comment. This article did not suggest what you seem to have gleaned from it. A 401(k) is not an asset class, but a kind of account, a wrapper if you will. It can hold real estate, gold, common stocks, cash and almost any other kind of asset. It is subject to both plan and statutory rules which makes it more challenging. It is like we described, an underdeveloped area which seems absurd given this is a pillar of Islam.

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Dawah and Interfaith

10 Lessons I Learned While Serving Those in Need

Abu Ryan Dardir

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charity
Which deeds are most beloved to Allah?

Alhamdulillah, by the blessings of Allah (swt) and readers like yourself, MuslimMatters has been an independent platform for our best thought leaders to educate us in our faith and catalyze change through powerful, necessary conversations. Since our humble beginnings as a basic wordpress blog in 2007, our content has remained free.

The Prophet (SAW) has taught us the best of deeds are those that done consistently, even if they are small. Click here to support us with a monthly donation of $10 per month, or even as little as $1. Set it and collect blessings from Allah (swt) for the khayr you're supporting without thinking about it.

I have spent about a decade serving the impoverished domestically and recently, abroad. I don’t work for a major charity organization, I work for my community, through grassroots efforts. It was something embedded in me while learning Islam. Before starting a charity organization, I started studying Islam with Dr. Hatem Alhaj (my mentor) and various other scholars. The more I studied, the more I wanted to implement what I was learning. What my community needed at the time was intensive charity work, as it was neglected entirely by our community. From that, I collected 10 lessons from servicing those in need. 

My bubble burst

One of the first things I experienced was the bursting of my bubble, a sense of realization. I, like many others, was unaware of the hardship in my own community. Yes, we know the hadith and see the events unfold on the news and social media, but when a father of three cried before me because a bag of groceries was made available for him to take home, that moment changed me. We tend to forget how little it takes, to make a huge difference in someone’s life. This experience, made me understand the following hadith of the Prophet Muhammad (peace be upon him): “Every Muslim has to give in charity.” The people then asked: “(But what) if someone has nothing to give, what should he do?” The Prophet replied: “He should work with his hands and benefit himself and also give in charity (from what he earns).” The people further asked: “If he cannot find even that?” He replied: “He should help the needy, who appeal for help.” Then the people asked: “If he cannot do (even) that?” The Prophet said finally: “Then he should perform good deeds and keep away from evil deeds, and that will be regarded as charitable deeds.” – Sahih Al-Bukhari, Volume 2, Hadith 524. I

t is simply an obligation, due to the amount of good it generates after you do this one action. I then realized even more how beautiful Islam is for commanding this deed. 

Friendships were developed on good deeds

Serving the poor is a great reward in itself. The Prophet Muhammad ṣallallāhu 'alayhi wa sallam (peace and blessings of Allāh be upon him) said: “Save yourself from hellfire by giving even half a date-fruit in charity.” – Sahih Al-Bukhari, Volume 2, Hadith 498. But it is better done with a team, I began building a team of people with similar objectives in serving the needy. These people later became some of my closest friends, who better to keep close to you than one that serves Allah subḥānahu wa ta'āla (glorified and exalted be He) by helping the neediest in the same community you reside in. Prophet Muhammad ṣallallāhu 'alayhi wa sallam (peace and blessings of Allāh be upon him) said: “A person is likely to follow the faith of his friend, so look whom you befriend.” [reported by Abu Dawood & Tirmidhee] This is turn kept me on the right path of pleasing Allah subḥānahu wa ta'āla (glorified and exalted be He). Working with a team removes a lot of the burden as well and the depression that might occur seeing the saddest stories on a daily basis. Allah says in the Qur’ān, “Indeed the believers are brothers.” (49:10). Sometimes there is a misconception that you have to have a huge office or a large masjid in order to get work done. But honestly, all you need is a dedicated group of people with the right intention and things take off from there. 

The Prophet Muhammad (peace be upon him) said: 'If you love the poor and bring them near you. . .God will bring you near Him on the Day of Resurrection.' - Al-Tirmidhi,Click To Tweet

Made me thankful

This made me thankful for whatever I had, serving the less fortunate reminded me daily to turn to Allah and ask for forgiveness and so be thankful. This kind of service also puts things into perspective. What is truly important in life? I stepped further and further away from a materialistic lifestyle and allowed me to value things that can’t be valued by money. I learned this from the poorest of people in my community, who strived daily for their family regardless of their situation — parents who did what they can to shield their children from their harsh reality. The Prophet Muhammad (peace be upon him) said: “If you love the poor and bring them near you. . .God will bring you near Him on the Day of Resurrection.” – Al-Tirmidhi, Hadith 1376. They had a quality about them, despite their poverty status. They were always some of the kindest people I have known. 

People want to do Good

I learned that people want to do good; they want to improve their community and society. I began to see the impact on a communal level, people were being more engaged. We were the only Muslim group helping indiscriminately in our county. Even the people we helped, gave back by volunteering at our food pantry. We have schools where small kids (under adult supervision) partake in preparing meals for the needy, local masajids, churches, and temples, high school kids from public schools, and college organizations (Muslim and nonMuslim) visit frequently from several cities in neighboring counties, cities, and states. The good spreads a lot easier and faster than evil. People want to do good, we just need more opportunities for them to join in. United we can rock this world.

“We need more light about each other. Light creates understanding, understanding creates love, love creates patience, and patience creates unity.” Malcolm X. Click To Tweet

Smiles

Smiles, I have seen the wealthiest smiles on the poorest people. Despite being on the brink of homelessness, when I saw them they had the best smile on their faces. This wasn’t all of them, but then I would smile back and that changed the environment we were in. The Prophet Muhammad (peace be upon him) said: “Charity is prescribed for each descendant of Adam every day the sun rises.” He was then asked: “From what do we give charity every day?” The Prophet answered: “The doors of goodness are many…enjoining good, forbidding evil, removing harm from the road, listening to the deaf, leading the blind, guiding one to the object of his need, hurrying with the strength of one’s legs to one in sorrow who is asking for help, and supporting the feeble with the strength of one’s arms–all of these are charity prescribed for you.” He also said: “Your smile for your brother is charity.” – Fiqh-us-Sunnah, Volume 3, Number 98. Smiles are truly universal.

It’s ok to cry

It was narrated that Abu Hurayrah raḍyAllāhu 'anhu (may Allāh be pleased with him) said: The Messenger of Allah said: “A man who weeps for fear of Allah will not enter Hell until the milk goes back into the udder, and dust produced (when fighting) for the sake of Allah and the smoke of Hell will never coexist.” Narrated by al-Tirmidhi and al-Nasaa’i. There are situations you see that hit you hard; they fill your heart with emotions, but that never swayed my concrete belief in Allah’s wisdom. Crying before Allah, not just out of fear, but to be thankful for His Mercy upon you is a relief.

Learning to say no

It was one of the hardest things I had to do, a lot (if not all) of the requests I received for help were extremely reasonable. I do not think anyone asked for anything outrageous. Our organization started becoming the go-to organization in our area for help, but we are one organization, with limited resources, and a few times we were restricted on when or how we could help. This is where learning to say no became a learned skill. Wedid do our best to follow up with a plan or an alternative resource.

It is part of raising a family and finding yourself

How so? Being involved in your community doesn’t take away from raising your family, it is part of it. I can’t watch and do nothing and expect my children to be heroes. I have to lead by example. Helping others is good for my family’s health. Many people living in our country are consumed with their busy lives. Running out the door, getting to work, driving the kids to their after school activities, spending weekends taking care of their families, etc. So people have a fear of investing hours in doing this type of work. But in reality, this work puts more blessings in your time.

One may feel they are taking time away from their family, but in reality, when one comes back home, they find more peace in their home then they left it with. By helping others, I improve the health and culture of my community, this in turn positively impacts my family.

I enjoy being a softie with my family and friends. I am a tall bearded man, and that image suited me better. I am not sure what made me softer, having kids or serving the poor. Either way, it was rewarding and defined my role and purpose in my community.

I learned that you make your own situation. You can be a spectator, or you can get in there and do the best you can to help. It gave me an opportunity to be a role model for my own children, to show them the benefit of doing good and helping when you can.

It came with a lot of humility. Soon after starting I realized that all I am is a facilitator, Allah subḥānahu wa ta'āla (glorified and exalted be He) is giving an opportunity of a lifetime to do this work, a line of work very little people get to engage in regularly. My advice to my readers, if you can serve the poor do so immediately before you get occupied or busy with life.

Helping others is good for my family’s health.Click To Tweet

Dawah through action

As I mentioned before I did spend time studying, and at one point developed one of the top dawah initiatives in the country (according to IERA). But the reality is, helping the less fortunate is my type of dawah, people started to associate our food pantry and helping others with Islam. As an organization with one of the most diverse groups of volunteers, people from various religious backgrounds found the environment comfortable and hospitable. I began working with people I never would have worked before if I had stuck to traditional dawah, studying, or masjid involvement, all of which are critical. This became a symbol of Islam in our community, and while serving, we became those that embodied the Quran and Sunnah. For a lot of those we served, we were the first Muslims they encountered, and Alhamdulilah for the team we have. Allah subḥānahu wa ta'āla (glorified and exalted be He) also says in the Quran: “So by mercy from Allah, [O Muhammad], you were lenient with them. And if you had been rude [in speech] and harsh in heart, they would have disbanded from about you” (3:159). It is our actions that can turn people away or towards Islam.

Once you serve the needy, you do this for life

I wasn’t volunteering on occasion,— this was an unpaid job that was done regularly. I got requests and calls for emergencies daily at times. It took up hours upon hours every week. As a charity worker, I developed experience and insight in this field. I learned that this was one of the best ways I could serve Allah [swt. “They ask you (O Muhammad) what they should spend in charity. Say: ‘Whatever you spend with a good heart, give it to parents, relatives, orphans, the helpless, and travelers in need. Whatever good you do, God is aware of it.'” – The Holy Quran, 2:215

I believe the work I do with the countless people that do the same is the best work that can be done in our current political climate and globalization. My views and thoughts have evolved over the years seeing situations develop to what they are today. This gave me a comprehensive outlook on our needs as a society and allowed me to venture off and meet people top in their fields like in social activism, environmentalism, labor, etc.

I want to end with three sectors in society that Muslims prosper in and three that Muslims can improve on. We strive on individual education (noncommunal), distributing and organizing charity, and more recently being politically engaged. What we need to improve on is our environmental awareness, working with and understanding unions and labor rights, and organizing anti-war movements. 

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He Catches Me When I Fall: A Journey To Tawakkul

Merium Khan, Guest Contributor

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Tawakkul- a leaf falling
Which deeds are most beloved to Allah?

Alhamdulillah, by the blessings of Allah (swt) and readers like yourself, MuslimMatters has been an independent platform for our best thought leaders to educate us in our faith and catalyze change through powerful, necessary conversations. Since our humble beginnings as a basic wordpress blog in 2007, our content has remained free.

The Prophet (SAW) has taught us the best of deeds are those that done consistently, even if they are small. Click here to support us with a monthly donation of $10 per month, or even as little as $1. Set it and collect blessings from Allah (swt) for the khayr you're supporting without thinking about it.

While discussing an emotionally-heavy issue, my therapist brought up the point that in life we can reach a point of acceptance in regards to our difficult issues: “It sounds cliche, but there’s no other way to say it: it is what it is.”

Okay, I thought, as I listened. Acceptance. Yes, I can do this eventually. She went on to add: “It is what it is, and I know that everything will be okay.””

Tears had already been flowing, but by this point, full-blown sobs started. “I…can’t….seem…to ever…believe that.” There. I had said it. I had faked being confident and accepting, even to myself. I had faked the whole, “I have these health problems, but I am so together” type of vibe that I had been putting out for years.

Maybe it was the hormones of a third pregnancy, confronting the realities of life with multiple chronic diseases, family problems, or perhaps a midlife crisis: but at that moment, I did not feel deep in my heart with true conviction that everything would be okay.

That conversation led me to reflect on the concept of tawakkul in the following weeks and months. What did it mean to have true trust in Allah? And why was it that for years I smiled and said, “Alhamdulillah, I’m coping just fine!” when in reality, the harsh truth was that I felt like I had not an ounce of tawakkul?

I had led myself to believe that denying my grief and slapping a smile on was tawakkul. I was being outwardly cheerful — I even made jokes about my life with Multiple Sclerosis — and I liked to think I was functioning all right. Until I wasn’t.

You see, the body doesn’t lie. You can tell all the lies you want to with your tongue, but after some time, the body will let you know that it’s holding oceans of grief, unshed tears, and unhealed traumas. And that period of my life is a tale for another time.

The short story is that things came to a head and I suddenly felt utterly overwhelmed and terrified daily about my future with a potentially disabling disease, while being diagnosed with a second major chronic illness, all while caring for a newborn along with my other children. Panic attacks and severe anxiety ensued. When I realized that I didn’t have true tawakkul, I had to reflect and find my way again.

I thought about Yaqub (Jacob). I thought long and hard about his grief: “Yaa asafaa ‘alaa Yusuf!” “Oh, how great is my grief for Joseph!”

He wept until he was blind. And yet, he constantly asserted, “Wallahul-Musta’aan”: “Allah is the one whose help is sought.” And he believed.

Oh, how did he believe. His sons laughed and called him an old fool for grieving over a son lost for decades. He then lost another dear son, Binyamin. And yet he said, “Perhaps it will be that my Lord will bring them to me altogether.”

There is no sin in grief Click To Tweet

So my first realization was that there was no sin in the grief. I could indeed trust Allah subḥānahu wa ta'āla (glorified and exalted be He) while feeling a sorrow so profound that it ripped me apart at times. “The heart grieves and the eyes weep, but the tongue does not say that except which pleases its Lord. Oh, Ibrahim, we are gravely saddened by your passing.” These are the words of our Prophet ṣallallāhu 'alayhi wa sallam (peace and blessings of Allāh be upon him) for a lost infant son, said with tears pouring down his blessed face, ṣallallāhu 'alayhi wa sallam (peace and blessings of Allāh be upon him).

I thought of the Year of Grief, Aamul-Huzn, when he, Allah’s peace be upon him, lost the woman who was the love of his life and the mother of his children; as well as an uncle who was like a father. The year was named after his grief! And here I was denying myself this human emotion because it somehow felt like a betrayal of true sabr?

Tawakkul, tawakkul, where are you? I searched for how I could feel it, truly feel it.Click To Tweet

Through years of introspection and then therapy, I realized that I had a personality that centered around control. I expressed this in various ways from trying to manage my siblings (curse of the firstborn), to trying to manage my childbirth and health. If I only did the “right” things, then I could have the perfect, “natural” birth and the perfect picture of health.

When I was diagnosed with a chronic disease, these illusions started to crack. And yet even then, I thought that if I did the right things, took the right supplements and alternative remedies and medications, that I wouldn’t have trouble with my MS.

See, when you think you control things and you attempt to micromanage everything, you’ve already lost tawakkul. You’ve taken the role of controlling the outcome upon yourself when in reality, your Lord is in control. It took a difficult time when I felt I was spiraling out of control for me to truly realize that I was not the master of my outcomes. Certainly, I would “tie my camel” and take my precautions, but then it was a matter of letting go.

At some point, I envisioned my experience of tawakkul as a free-fall. You know those trust exercises that you do at summer camps or company retreats? You fall back into the arms of someone and relinquish any control over your muscles. You are supposed to be limp and fully trust your partner to catch you.

I did this once with a youth group. After they fell–some gracefully and trusting, some not — I told them: “This is the example of tawakkul. Some of you didn’t trust and you tried to break your fall but some of you completely let go and let your partner catch you. Life will throw you down, it will hit you over and over, and you will fall–but He, subḥānahu wa ta'āla (glorified and exalted be He), will be there to break your fall.”

I am falling. There is a degree of terror and sadness in the fall. But that point when through the pain and tears I can say, “It is what it is, and no matter what, everything will be okay”, that right there is the tranquility that comes from tawakkul.

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#Life

So You Are The Wali, Now What?

Dr Shadee Elmasry

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Which deeds are most beloved to Allah?

Alhamdulillah, by the blessings of Allah (swt) and readers like yourself, MuslimMatters has been an independent platform for our best thought leaders to educate us in our faith and catalyze change through powerful, necessary conversations. Since our humble beginnings as a basic wordpress blog in 2007, our content has remained free.

The Prophet (SAW) has taught us the best of deeds are those that done consistently, even if they are small. Click here to support us with a monthly donation of $10 per month, or even as little as $1. Set it and collect blessings from Allah (swt) for the khayr you're supporting without thinking about it.

The way most Muslims (as well as conservative Christians and Jews) live, a man asks for a woman’s hand in marriage from the father.

The father is not just a turnstile who has to say yes. He is a “wali” or protector and guardian of his daughter’s rights. So he will be asking some serious questions that would be awkward if the woman had to ask them.

Furthermore, in the Muslim community today esp. in the West, there are many converts that seek out a wali because they have no male relative who is Muslim. In this post, I share some guidelines aimed at the wali in his new role and stories that are useful.

Being a wali is not an honorary role. You’re not just throwing out the first pitch. You’re actually trying to throw curveballs to see whether the proposal checks out or has issues.

Here are some questions and demands a wali should make:

Background check: Call and meet at least four people that were close to the man who has proposed and interview them. There’s no husn al-zann (good opinion) in marriage. As a potential suitor, you are rejected until you prove yourself, much like an application for employment. These days, most people’s background can be found on their social media, so the wali has to spend time scrolling down. Keep scrolling, read the comments, look at the pictures, click on who’s tagged in those pictures. Get a good idea. You are a private investigator *before* the problem happens, not after. 

Check financials:  You need to see the financials to make sure they are not in some ridiculous debt or have bad credit such that they can’t even rent an apartment or cover basic needs. You want some evidence that he can fulfill the obligation of maintenance.

Check the educational background or skill set: This is a given. If it’s solid, then it can outweigh lack of funds at this moment.

Check medical records: If this is a stranger, the wali needs medical records. There was once a wealthy, handsome young man that was suave and a seemingly amazing prospect who proposed for a girl who was comparatively of average looks and from a family of very modest means. The mother and daughter were head over heels, but the dad had enough common sense to know something was up.

“Why would he come knocking on our door?,” he asked.

So the father demanded medical records. The guy never produced them. When the dad pressed him, the man admitted, he had a sexually transmitted disease (STD) and that’s why he couldn’t find anyone else to marry him.

Now note, there are legitimate cases where people have a past when they have made mistakes. This happens to the best of us, and the door for tawbah (repentance) is open. In those cases, there are organizations that match-make for Muslims with STDs. People should act in a responsible manner and not damage the lives of other humans beings.

Lifestyle: It is your job to check if the two parties have agreed on life essentials such as religious beliefs, where to live, how to school kids, etc?

In-laws: Have you at least met the family of the suitor and spent some time with them to make sure there’s nothing alarming?

Engagement: Contrary to popular understanding, there is such a thing as engagement in Islam. It’s an announcement of a future commitment to marriage. Nothing changes between the fiancees, but nobody is allowed to propose anymore. The purpose of engagement is to give time for both parties to get ready. For example, the groom may want to save up some money, or the girl may be finishing up college. Also, it’s easy to put on a face during the get-to-know process, but it’s hard to fake it over an eight or nine-month period. I remember a story where a young woman was engaged, and four months into the engagement they discovered the young man was still getting to know other women. He basically reserved the girl and then went to check for better options. Needless to say, he was dumped on the spot. Engagements are commonly a few months. I think more than a year is too much.

Legal/Civil:  The marriage should be legal/civil in the country where you will settle. If you accept a Shariah marriage but not a civil one, know that you’re asking for legal complications, especially if a child enters the picture. (Ed. Note- we realize that some countries do not allow legal registration of more than one marriage- if that is a consideration please look at all options to protect your ward. There are ways to get insurance that can be set up.)

Mahr: Get 50% of the dowry upfront (or some decent amount) and whatever is scheduled to be paid later should be written and signed. I’ve seen too many cases where a really nice dowry is “promised” but never produced.

The dowry should be commensurate to current standards depending on the man’s job. For example in our area in America 5, 7, or 10k is a common range.

In sum, there are very few things in life that are as bad as misery in marriage. The wali’s job is to eliminate the bad things that could have been avoided. If that means he has to be demanding and hated for a few months, it’s worth the cost.

It’s preventative medicine.

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