Dear Bob,
It's a little unusual for a former employer to force the participant leave its 401(k) plan when the former employee has more than $5,000 in the plan. If she's happy with the old plan, she should talk with the plan administrator about the forced rollover. I have money in a previous employer's 403(b) plan, and I haven't worked there in a decade. (I do it because of the plan's low cost and its investment options.)
I think rolling the money into her new employer's plan isn't a very attractive option other than for convenience, or possibly its investment options. In general she'll be able to better manage fees and expenses and have more investments to choose from if she does a direct transfer into either a traditional or Roth IRA.
There is no 10 percent penalty tax associated with a rollover. The penalty tax comes up if she takes an early distribution out of the 401(k) plan. She's not taking a distribution; she's doing a rollover.
I recommend a direct or trustee-to-trustee transfer because if the employer cuts her a check in her name, then the amount is subject to 20 percent mandatory Internal Revenue Service withholding. She should eliminate the fuss and bother by doing a direct transfer to the new retirement account.
The decision between a direct transfer into a Roth IRA or a direct transfer into a traditional IRA comes down to whether you think you'll be at a higher tax rate in retirement than you are today, whether you can afford to pay the income taxes due on the Roth conversion with money outside the 401(k) balance and how you feel about tax diversification of your retirement portfolios.
A Roth IRA is funded with after-tax dollars, so deferred-income contributions coming out of your 401(k) plan and going into your Roth IRA would become taxable income. Qualified distributions out of the account, however, are tax-free in retirement. Talk to you tax professional if you can't decide on your own.
If the old 401(k) account includes shares of the former company's stock, your wife should work with a tax professional to transfer the shares to a taxable account at the same time she's doing the direct transfer of the other assets in the account to a Roth or traditional IRA. This strategy would allow her to benefit from the special tax treatment of the net unrealized appreciation, or NUA, of the stock.