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New legislation that aims to give workers greater opportunities to save for retirement may put the kibosh on a strategy for passing large individual retirement accounts to heirs. Last week, the House Ways and Means Committee passed a bill known as the Secure Act. Among other things, the legislation would require employers with a 401(k) plan to allow long-term part-time workers to participate. It would also create a $500 tax credit for small companies that initiate retirement plans with automatic enrollment. Tucked away in the bill, however, is a provision that would force most nonspouse beneficiaries to draw down inherited retirement accounts within 10 years of the original owner's death. This provision could dissuade wealthy owners from using a tactic known as the "stretch IRA."

That strategy allows younger heirs — children and grandchildren, for instance — to take required minimum distributions from the inherited account based on their own much longer life expectancy. Those heirs get the advantage of "stretching" the IRA's tax-deferred growth over many years while taking smaller RMDs. "The stretch gave you benefits without making you have much of a trade-off," said Jeffrey Levine, CPA and CEO of BluePrint Wealth Alliance in Garden City, New York. "The question is now, 'Are we comfortable with everything in this IRA going to the kids in a 10-year period?'" he asked.

Nonspouse beneficiaries

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Under current law, if you inherit an IRA from someone who isn't your spouse, you're generally required to start taking minimum distributions calculated on your life expectancy by Dec. 31 after the year the original account owner died. The House version of the bill would force a distribution of the account's value within 10 years. The Senate version would distribute the account in five years if the beneficiary is not a spouse and if the account value exceeds $400,000 as of the date of death. Both proposals make an exception if the beneficiary is the surviving spouse, a disabled or chronically ill person, an individual who is no more than 10 years younger than the account owner or the minor child of the account owner. More from Personal Finance:

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These people are about to retire and have nothing saved The stretch IRA is most beneficial to young heirs of larger accounts. These beneficiaries have years of tax-deferred growth ahead of them, and they only need to take a small distribution each year. For example, based on current law, a 22-year-old who inherits a $1 million IRA as a nonspouse beneficiary would be on the hook for an RMD of $16,400 or 1.64% of the account's value that first year, said Levine. That RMD is subject to income taxes. If you fast-forward 18 years, that beneficiary is then 40 years old. That year, he is responsible for a distribution of 2.32% of the value of the IRA, Levine said. "We're still talking about an exceptionally small percentage of the account that must be distributed each year," he said. On the other hand, an accelerated distribution of the account over a much shorter period of time would result in a large tax bite, Levine said.

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