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1. Introduction
Zakat, one of the five pillars of Islam, means purification and growth. It is an obligation on every Muslim possessing a minimum threshold of wealth (nisab) for a complete cycle of one Islamic lunar year (hawl) to donate to the poor and needy a certain percentage of wealth. There is consensus among Islamic jurists that zakat must be paid on crops, fruit, livestock, merchandise, minerals, gold, silver and treasures (Sabiq, 1991). Monetary assets such as currency and assets that can be converted into currency are also subject to zakat, as currency has replaced gold and silver as a medium of exchange and store of value. This paper examines whether zakat is due on a special type of monetary asset: pension and retirement accounts. In the USA alone, billions of dollars of monetary assets are held in the form of pension assets for Muslim Americans. Many of these Muslim Americans face a serious challenge of determining which alternative form of pension accounts are subject to zakat. There is no prior research work in the extant literature examining zakatability of alternative retirement plans offered in the US marketplace. This paper fills this void and provides a comprehensive survey and analysis of all available retirement plans and their treatment with respect to zakat. This paper is organized as follows: Section II discusses various types of retirement accounts and compares and contrasts alternative forms of retirement accounts based on contributions, investment risks, ownership control and benefits. Section III discusses which of these plans are subject to zakat and the timing of payment of zakat. Section IV concludes the paper.
2. Pension plans
A pension or retirement plan is a safety net or “nest egg” that provides a person with financial resources (i.e. cash flow in the form of monthly payments or a lump sum amount) to pay for all expenses when he or she leaves the active workforce and has no income or paycheck. These plans are sponsored by employers (for example, private and public institutions such as for-profit and not-for-profit corporations or state, city and local governmental units) or the federal government, or they are offered by investment brokerage houses as self-directed plans driven by tax...