We are often asked if Muslim retirement savers can choose beneficiaries outside of Islamic inheritance rules. After all, naming beneficiaries on IRAs and 401(k)s a basic part of keeping accounts in order.
Generally, an owner of an employer retirement plan or pension account preselects the beneficiaries of his or her retirement account, which means that when the owner dies, the retirement benefit automatically passes to the preselected beneficiaries. For this reason, the retirement account is not distributed according to the person’s Islamic will, which can leave some observant Muslims wondering if it’s okay to designate beneficiaries at all.
Prominent scholars, including those on Azzad’s Shariah Advisory Board, have concluded that retirement accounts are not necessarily included in a Muslim’s estate, and that it’s okay to name beneficiaries outside an Islamic will.
Retirement accounts permit ongoing contributions from employers and employees, and they are generally not considered fully owned by the account holder. For this reason, among others, they are not part of the owner’s estate. And since a retirement plan or pension is not considered part of an account owner’s inheritance, the preselected beneficiaries are entitled to receive the benefit.
If someone passes away without selecting a beneficiary, our scholars note that those assets should be distributed according to Islamic inheritance rules. Once a beneficiary is designated, however, the retirement account is treated similarly to that of a trust, which is also exempt from inheritance requirements.