MY wife, who is not employed, has medical bills which are not covered by my medical coverage. Can she withdraw money from her 401K plan to cover the cost of these medical expenses without penalty even though she is only 58?

Yes, if the medical expenses EXCEED 7.5% of your combined adjusted gross income.

Note that, though there is NO penalty, the 401K distribution WILL be taxed as ordinary income on your joint return.

Medical cost do not exceed 7.5% of our combined income. But this is a 401k she had prior to our being married, its not common property at the moment so does she have to use combined income to determine her income or can she go solo and use her own, which is zero?

Actually her income is not $0, but rather is equal to her 401(k) withdrawal amount. To avoid the early withdrawal penalty your medical expeses have to exceed 7.5% of adjusted gross income. If you file jointly, that AGI figure will include both your incomes. So this may be one of those time when it's better to file separately rather than jointly, so that her AGI is reported as only the amount of her 401(k) withdrawal. Your own tax return will probably be higher this way, but as a couple you might actually reduce your total taxes. I suggest you run the numbers both ways and see which turns out better for you.

Also - if this works out for you she will have to file form 5329 with her tax return to document why she does not owe the 10% penalty (she would put exception code "5" on line 2).