1) You generally can't withdraw from a 457 while still employed by the related employer, but once you separate from service you can withdraw at any time without a penalty. Different employers have different rules about what types of withdrawals (one lump sum all at once, however much you want, etc).
2) If she withdraws from the 457 it will be subject to income tax at your marginal rate. If all income between the two of you falls below the deduction then she wouldn't pay tax. She would have to roll the 457 over into a Roth, not just withdraw and contribute -- make sure it's coded as a rollover contribution. Or do a trustee to trustee transfer. If you have earned income in excess of the amount contributed both you and she can contribute to either traditional or Roth IRAs. What you do with the 457 withdrawal is up to you. Rather than rolling the 457 over to a Roth IRA in a low income year, I would roll over from a traditional IRA if you have one to Roth. Once money is rolled from a 457 to an IRA the penalty free withdrawal option will be lost.
I'm assuming this is a governmental 457 with these answers. I don't think a non-governmental 457 can be rolled over to an IRA.
