While code 2 would have made things easier, you can indicate that your wife separated from service the year during or after age 55 during the 1099-R interview. You'll do this on the screen that says "These situations may lower your tax bill", which comes up late in the TurboTax interview. This way the additional 10% tax won't apply to her distribution. 

As mentioned, TurboTax states "Let's see if we can reduce your early withdrawal penalty" and "These situations may lower your tax bill" towards the end of the 1099-R interview, after you reach the screen that lists Your 1099-R Entries. Just keep answering the interview questions and you'll get there eventually. And make sure you check "qualified retirement plan" when asked to identify the plan since your wife's 403(b) plan is a qualified plan. Otherwise, you won't see "separation from service the year during or after age 55" listed.