I have been married for four years, we have been separated for two years living in separated households. We are getting ready to for through a divorce. How will my 401K be affected in the divorce. I am not even fully vested in my 401K until next year and I have two outstanding loans towrds it.

I have been married for four years, we have been seperated for two years living in seperated households. We are getting ready to fo through a divorce. How will my 401K be affected in the divorce. I am not even fully vested in my 401K until next year and i have two outstanding loans towrds it.

It is typical for a divorce decree to mandate that the portion of your 401(k) that was built up during the marriage gets split with half going to each spouse. Of course this does not mean that this is specifically what will happen in your case - it all depends on what you and your soon-to-be-former-spouse negotiate. If this does happen the court will issue a "Qualified Domestic Relations Order" (QDRO) which will require that the 401(k) plan administrator split the funds into two accounts. This does NOT trigger any sort of penalty or income tax on you, if done properly. Just a word of warning - the QDRO must be executed properly or you run the risk of the IRS deeming this split to be a distribution. For example, the funds must be split into qualified retirement accounts for both parties - if instead your spouse takes the money in cash it will trigger penalties and income tax on you (watch for this - it's a common ploy that the spouse's divorce lawyer might try to sneak past you, so beware). Here are a couple of articles to read for more info on how QDRO's work:

http://retireplan.about.com/lw/Business-Finance/Personal-finance/How-a-Qualified-Domestic-Relations-Order-QDRO-Works.htm
http://www.thestreet.com/story/11092992/1/qdro-rules-use-of-401k-in-divorce.html