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If your wife takes the money in cash, rather than rolling it directly into an IRA plan of her own, she has 60 days to deposit the amount into a retirement account. After that, she must pay taxes on it as ordinary income. If she hasn’t yet reached age 59½, she, not you, will be subject to the 10 percent penalty unless she receives a special exemption from the IRS. For example, if she is disabled, she’s not subject to the penalty. She won't have to pay it if she uses the funds toward tuition for herself or a dependent, or if she uses up to $10,000 of it as a down payment to buy a home. She would still have to pay income tax on it, though.
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