Mesenchymal stem cells (MSCs) are multipotent, relatively non-immunogenic, and can differentiate according to environmental cues, making them an ideal candidate for numerous allogeneic cell therapies. Moreover, MSCs have consistently demonstrated excellent safety profiles in clinical trials, but poor therapeutic responses have impeded their translational success. Induced pluripotent stem cell (iPSC)-derived MSCs (iMSCs) engineered with stealthing features are designed to address the shortcomings of traditional MSC therapeutics, including source heterogeneity, limited expansion potential, and suboptimal pharmacokinetics. Here, we report on the development and characterization of β2 microglobulin-knockout iMSCs (B2M-KO iMSCs) derived from mRNA-reprogrammed iPSCs that were gene edited to eliminate B2M expression. B2M is a critical protein of the human leukocyte antigen class I complex (HLA-I), which has been implicated in T cell-mediated immune clearance. Accordingly, unlike traditional MSCs that express some degree of HLA-I and minimal HLA-II, B2M-KO iMSCs expressed neither HLA-I nor HLA-II. Interestingly, relative to tissue-derived MSCs and wild-type iMSCs (WT iMSCs), B2M-KO iMSCs better suppressed T cell proliferation in an activated PBMC co-culture assay (p = 0.042). To investigate the mechanism of increased immunosuppression, B2M-KO iMSCs and WT iMSCs were primed with IFNγ for 48 hours and then assessed for expression of the immunoregulatory enzyme, indoleamine 2,3-dioxygenase 1 (IDO1) via western blot and immunofluorescence staining. B2M-KO iMSCs showed greater IDO1 production in response to IFNγ relative to WT iMSCs. At 54 hours post IFNγ-exposure, B2M-KO iMSCs also showed sustained low levels of IDO1 production, whereas WT iMSCs did not show any residual IDO1 expression. Addition of the small molecule IDO1 inhibitor, Epacadostat, significantly reduced suppression of T cell proliferation for all MSC groups (p = 0.032), revealing that IDO1 is required for suppression of T cell proliferation by MSCs. These results suggest that B2M-KO iMSCs may prove useful for the treatment of T cell mediated inflammatory conditions.