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From the Desk of:

John D. Pivirotto
Calif. Insurance License #06993078

Financial Concepts

Burlingame, CA 94010
(650) 348-1880
(650)348-0255 Fax


Helping Build & Protect Your Future

Investment Advisor Representative
Securities and Advisory Services
offered through
Lincoln Financial Securities Corporation
Member SIPC

Current tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the particular set of facts and circumstances. The information contained in this newsletter is not intended as tax, legal, or financial advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek such advice from your professional advisors. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Written and published by Liberty Publishing, Inc. Copyright © 2009 Liberty Publishing, Inc.
Copyright 2009 Liberty Publish- ing, Inc., Beverly, MA. The opinions and recommendations expressed herein are solely those of Liberty Publishing, Inc., and in no way represent advice, opin ions, or recommendations of the Financial Planning Association, its affiliates or members. CFPTM and CERTIFIED FINANCIAL PLANNERTMare federally registered service marks of the Cer- tified Financial PlannerBoard of Standards (CFP Board). This summary does not constitute legal and/or tax advice and should only be relied upon when coordinated with a qualified legal and/or tax advisor. Febuary, 2009.
​Understanding Retirement Plans 
The simple definition of a pension plan is that it is a means for providing income when you reach retirement age and will no longer be working. If you are self-employed, it will be up to you to set up and administer your own retirement plan. 

For many employer-sponsored plans, eligibility is usually based on having attained age 21 and the completion of one year of service with the company. If your company is a corporation and offers a retirement plan benefit, it will be one of two basic types: either a defined benefit plan or a defined contribution plan. 

A defined benefit plan provides the classic, traditional pension. At retirement age, the company will pay a fixed, lifetime income, the amount of which generally depends on the highest attained salary and the length of employment. Defined benefit plans are typically financed entirely by the employer; the employee generally pays nothing into this type of plan. The company assumes the responsibility for making sure that money is available to fund the benefit when the employee is ready to retire. 

By comparison, a defined contribution plan does not promise a fixed lifetime pension, but rather only that “contributions” (the employee’s, the company’s, or some combination of both) will be made to a retirement account in the employee’s name. For example, a 401(k) plan is a defined contribution plan in which the employee would contribute a percentage of his/her salary (on a pre-tax basis) and the company might, at its discretion, make a matching contribution. The company would assume no responsibility for the size of the ultimate account. How large would the account be under this type of plan? It would depend on how much was contributed each year and how the money was managed. 

Whose Money Is It? 
Vesting is a term used to denote an employee’s entitlement to the funds in a plan. Generally, vesting is based on years of service with an employer, and with a few minor exceptions, the vesting rules are identical for defined benefit and defined contribution plans. 

In a defined contribution plan, all employee contributions, and earnings on such contributions, are 100% vested from the start of participation in the plan. On the other hand, vesting for employer contributions usually takes place over a period of years. Should an employee leave his/her place of employment prior to retirement, he/she generally would be permitted to roll over the entire amount vested to date to another employer plan or to an Individual Retirement Account (IRA). If the account balance under a defined contribution plan exceeds $5,000, the employee may leave the vested amount in the plan (to be drawn upon later at retirement).

 In contrast, with a defined benefit plan, the time of commencement of benefits is determined strictly by the terms of the plan. Although a vested benefit is accrued over working years, the plan could provide that benefits will not commence until a participant attains normal retirement age (no later than the later of age 65 or the fifth anniversary of the date plan when participation commenced). 

Many defined benefit plans also permit “early” retirement, although an early retirement benefit may be actuarially reduced because the participant is expected to receive benefits over a longer period of time than would be the case with commencing benefits at normal retirement age. If the employee leaves the company before normal retirement age, he/she could elect to receive an early retirement benefit if the age and service requirements (for early retirement) of the plan have been satisfied. 

In some defined benefit plans, a terminating employee will have his or her retirement benefit frozen. In that case, while the terminating employee generally cannot roll over pension benefits from one employer’s defined benefit plan to another employer’s defined benefit plan, distribution of the employee’s benefit will commence upon reaching normal retirement age. If an employee has a frozen pension with a previous employer, he/she might want to find out how the retirement benefit will be calculated.

 While neither plan is inherently better than the other, there has been a shift away from defined benefit plans toward defined contribution plans. Since the risks and potential rewards differ between the two basic types, it would be in your best interest to consult your financial professional. 

Podcasting Your Way to New Business  
In a crowded marketplace, getting your message out to potential customers can be a time-consuming and expensive process. But, by taking advantage of new technologies, you can reach a large, yet targeted audience without making endless sales calls or spending a ton of money on marketing and advertising. With the number of Americans using mp3 players and web-enabled cell phones growing at a strong pace, communicating with prospects via podcasting and other online tools is rapidly becoming the next marketing frontier.

Podcasts—a term coined by combining the brand name of Apple’s mp3 player and the word “broadcast”—are simply pre-recorded audio files delivered via RSS (Really Simple Syndication) to computers and mobile devices. While podcasting is often compared to radio broadcasting, podcasts are digital files that are created and stored online, often for several years. Users interested in listening to a particular podcast download the file to an “aggregator” website, such as My Yahoo, iTunes, or Juice. When listeners subscribe to a particular RSS “feed,” each new program the podcaster produces is automatically sent to the subscriber. Users can listen to podcasts at their convenience on their desktop computers or download the files to their mp3 players, cell phones, or other portable computers. 

Best of all for a small business with a limited marketing budget, an audio podcast can cost next to nothing to produce. With just a basic computer microphone and podcasting software that can be downloaded for free from several sources, you can create a podcast on almost any computer, recording and editing it yourself. If you have some money to spend and are looking for a more polished approach, you can also hire an advertising or marketing agency that specializes in producing podcasts for commercial purposes. 

While podcasting is still a relatively new technology, many businesses are already producing podcasts that deliver news and information about products or industry trends. Podcasters employ a variety of formats to convey their marketing messages, but they often emulate familiar radio formats, such as talk shows or news and commentary programs. Podcasts also come in the form of tutorials or educational programs. You could, for example, think about the types of questions posed by your customers and answer them in a series of chatty but informative programs. If you plan to produce a series of podcasts, the content should follow a consistent theme and schedule so that listeners know when they will receive your program and what to expect when they download it. 

Where can you post your podcasts? The most obvious place to start is your own website. When new or existing customers visit your website looking for information about your products or your company, a podcast can supplement the written content and graphics, allowing you to deliver your message more directly and at greater length. You can also make your podcasts available through search engines or post them on specialized podcast hosting websites. Visitors who come to these directories looking for information relating to your products or industry may come across your podcast while searching or browsing. If they like what they hear, you will have a new subscriber and, possibly, a new customer. Listeners who are particularly impressed by your podcasts may even pass them on to others. 

The web users currently downloading podcasts tend to be younger and more technologically savvy than the average consumer, but these demographics are set to expand, especially as more Internet-enabled cell phones come on the market and more new cars come equipped with mp3 jacks and multimedia players. Rather than turning on the radio and hoping to hear something they like, audiences will create their own listening experience with the programs they have selected. By producing compelling content aimed at people who are interested in your products, your podcasts could end up on the personal playlists of both loyal and potential customers. $

Family Employees Bring Home Tax Benefits 
If you are the owner of a small business, employing your children may help reduce both your family’s aggregated income subject to taxation and the effective rate at which that income is taxed. This fact applies whether you are running your business as a corporation, partnership, or sole proprietorship. Putting a family member on your payroll makes that person’s income—and the proportional costs of his or her employee benefits—deductible business expenses. 

As a result, the gross income of your business is lowered. While the total family income may remain essentially the same, the income paid to the family member (assuming he or she is not a spouse) is generally taxed at a lower rate. In addition, certain employee benefits are not taxable to the family member. Under this scenario, the family’s overall tax liability is lowered. 

Good News—Now and Later
 Suppose that you have a teenage daughter, Susan, who has good computer skills. If you directly pay Susan the going rate for maintaining your database, and keep a record of her hours and the work performed, her salary is tax deductible as a business expense. As long as her wages are less than the standard deduction ($5,450 in 2008), her income will be nontaxable. Income above that amount will be` taxed at Susan’s presumably lower tax rate. 

Alternatively, imagine that daughter Susan is still an infant. If Jane, your spouse, works in your business, the cost of paying for childcare while she works will be lessened through the allowable childcare tax credit for such expenses. 

Looking forward 20 years into the future, having Jane on the payroll could help out with retirement planning. Your company’s pension plan, or defined benefit plan—which qualifies under the Employee Retirement Income Security Act (ERISA, amended in 1974)—allows Jane to receive an annual minimum distribution of $10,000, regardless of whether her annual salary ever got that high. Most importantly, during Jane’s 20 years of service, your business was able to deduct contributions to the plan on her behalf from gross income. 

Perhaps your business offers a qualified retirement plan, such as a 401(k) plan. If so, the contributions made by your business to Jane’s account, up to a certain amount, also qualify as a tax-deductible business expense. 

IRAs Are Family-Friendly 
If your business does not offer a qualified retirement plan, or if family members like Jane and Susan do not participate in such a plan, then an Individual Retirement Account (IRA)—available only to employed individuals or their spouses—is an option. IRA contributions—limited to $5,000 in 2008—are tax deductible, subject to certain income limits for the employee (but not to the business), and allow for tax deferral on earnings until distributions are taken. Distributions taken before the age of 59½ may be subject to a 10% federal income tax penalty, as well as ordinary income taxes. Certain exceptions may apply.

 In Sickness and In Health 
As employees, Jane and Susan are eligible for other employee benefits your company may elect to provide, such as accident and health coverage, group term life insurance, and tuition assistance. The costs of these benefits, assuming they are reasonable, are also deductible business expenses. 

You should keep in mind that employing family members means they must actually work in the business for compensation that is reasonable for the type of work they are performing. Also, be aware that the tax status of any retirement account or plan vehicle (and there are many types) is strictly governed by statutes and regulations that cover both employer and employee. Nonetheless, putting family members on the payroll can often offer clear financial and tax benefits. 
Planning Strategies
*Disclosure – Securities and Advisory services offered through representatives of Lincoln Financial Securities Corporation, member FINRA & SIPC. FINRA Branch Office: 233 Bloomfield Road, Burlingame, CA 94010. 
This is not an offer to sell securities, which may be done only after proper delivery of a prospectus and client suitability is reviewed and determined. Information relating to securities is intended for use by individuals residing in California, Oregon, Washington and Colorado only. Advisory Services are offered to residents of the state of California only. Lincoln Financial Securities Corporation is not affiliated with Financial Concepts. Financial Concepts offer insurance & financial services to residents in California and Oregon. Variable & Group insurance products offered through LFS Marketing and Insurance Sales Corporation; fixed insurance products offered through Financial Concepts Insurance & Financial Services.
John Pivirotto’s California Insurance License #: 0699308
Financial Concepts’ California Insurance License #: 0786047