The idea behind the Snowball Effect is to turn a TFSA into a pension plan that increases its tax free income every year.
The partners purchase high quality, blue chip, dividend bearing equities and funds inside a TFSA with the goal of income - currently their Snowball mandate is yielding about 6.5%. Here's how it works and why it’s important:
Let’s say, Mrs. Smith has a TFSA worth $80K of equity mutual funds and a cash account with taxable securities. George and Scott replace those funds in the TFSA with their pre-selected Snowball securities, on January 1, 2018. At 6.5%, $80K would generate $5,200 worth of tax free income. This income is sent to Mrs. Smith either monthly or annually.
The TFSA rules say that on January 1, 2019 Mrs. Smith can contribute another $6K, plus anything taken out the previous year (in this case, $5,200). The partners move a total of $11,200 (6K + $5,200) from Mrs. Smith's non registered, taxable, account to her TFSA. This sum is then invested in the existing Snowball securities currently in the TFSA.
Assuming the original $80K has not fluctuated (and chances are it will somewhat) there is now $91,200 earning 6.5%. This translates into $5,928 worth of tax free income to Mrs. Smith in 2019. This income is sent to Mrs. Smith either monthly or annually. On January 1, 2020, Mrs. Smith can again contribute another $6K plus $5,928 (what she took out in 2019) for a total of $11,928. Now, the TFSA (again assuming market values stay the same) will be $103,128 and at 6.5% = Mrs. Smith can look forward to $6,703 of tax free income in 2020. See the snowball?
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