How one responds depends on what outcome one is seeking.

I am retarded and too literal. I struggle with poorly worded phrases (I am not up to date and will therefore not wear a mask around baby lest sister be uncomfortable).

Seriously though this is a good opportunity to practice finding the message behind the message.

I reckon sister is mostly frightened as a result of immersive programming. She may be highly educated (or not) but that is irrelevant.

Ignore the passive aggressive bait. When/if see confronts you directly then you can decide what outcome you seek. You could attack/ridicule her delusion. That is counter-productive IMO. Alternatively you could start by empathizing with her concern, then inform her that family is important to you and that you would like for her to be a part of your life. This way she can at least feel heard. If she must separate herself from the family then that is her prerogative.