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Bill, she was taking the RMDs each year as her mother was over 70 1/2.
If the nonspouse beneficiary has been taking RMDs from the 401(k) based on her single life expectancy, then she should be able to rollover the remaining assets in the 401(k) to an inherited IRA now since the distribution would occur this year even though the decedent died in 2006. She would continue taking distributions from the inherited IRA based on her remaining single life expectancy factor (which would be the factor in the year following the decedent's death reduced by 1 for each year from the initial RMD year). For example, if the decedent died in 2006, and the nonspouse's single life expectancy in 2007 was 33.1 years, then the factor this year would be 30.1.
See pages 6 and 7 - http://www.irs.gov/pub/irs-tege/rne_fall09.pdf
See questions #11 - 18 - http://www.irs.gov/pub/irs-drop/n-07-07.pdf