Paying Zakah due on a 401K account for years is a concern for many Muslims living in the West who may have inadvertently overlooked this obligation. A defined contribution plan like a 401k often fluctuates in value, leading to confusion on how to calculate past dues.

This article outlines the scholarly view on how to rectify missed payments and the correct method for calculating Zakah on retirement funds.

The Obligation of Zakah

Zakah is a pillar of Islam that must be discharged promptly once conditions are met.

The Prophet (peace and blessings be upon him) said:

“Islam has been built on five [pillars]: testifying that there is no god but Allah and that Muhammad is the Messenger of Allah, performing the Prayers, paying Zakah, making the pilgrimage to the House, and fasting in Ramadan.” (Sahih al-Bukhari 8)

If a Muslim forgets to pay, they should seek Allah’s forgiveness for this human inadequacy and move quickly to settle the arrears.

Options for Paying Zakah on 401K

According to experts in Islamic finance, there are two general approaches to handling Zakah on retirement accounts:

  1. The Deferred Method: One may accumulate the yearly due Zakah, year after year, but delay the actual payment until they begin withdrawing funds. At that point, they must pay the cumulative amount (which will be a large portion of each withdrawal). This is permitted because Zakah is technically not required to be paid from resources other than the item on which it is due (i.e., the inaccessible cash in the 401k).
  2. The Annual Metho: It is certainly permissible—and perhaps easier—to pay Zakah from one’s current income (outside the 401k) every year. This prevents a massive debt from accumulating.

How to Calculate Arrears for Past Years

For the specific case of missed payments over four years, the following steps should be taken to clear the debt:

Method A: Exact Estimation

  • Look at the account statements for each of the past four years.
  • Determine the market price of the funds for each specific year.
  • Calculate 2.5% of the balance for each respective year.

Method B: The Cautious Approach

  • Take the current (last year’s) balance, which is likely higher than previous years due to monthly additions.
  • Calculate the Zakah on this current balance.
  • Pay this amount four times.
  • Make the intention that any extra amount paid beyond the strict obligation is Sadaqah (voluntary charity).

This second method is safer and ensures the liability is fully discharged.