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Your situation is not uncommon these days. Because you moved to North Carolina you will be taxed in North Carolina on all your income from the day you moved onward. So, if you take the money out of the retirement account you will be required to include it on your NC return. You will be taxed on the federal level and the state level for the distribution. The 10% that you mentioned will be a penalty that is added on your federal return if your wife is not 55 when she takes out the money. The penalty is usually based on 59 1/2 but as she has ended her employment with the other company she can use the exception of being 55 and no longer working for the company. The form 5329 will be needed with your return to claim the exception on the penalty for federal. NC does not have a penalty.It does seem unfair that you would need to pay NC on the amount of retirement that was earned in Texas but unfortunately it is the fact that you would be a NC resident that determines who taxes you on income.