microFIT vs RRSP Conclusion?

In the first of this three part article, we described a comparative investment to the microFIT renewable energy program for individuals; that being the Registered Retirement Savings Plan (RRSP) or the Spousal Retirement Savings Plan (SRSP).

I suggest you refer back to the microFIT vs RRSP article for many details and assumptions, etc.

I will also repeat a statement from that article:

Remember, everyone’s own personal situation is unique. Before you make any decision you should contact a financial income tax specialist just as you need a licensed electrician for the AC connections and metering as well as an ESA inspection for a microFIT installation.”

In other words, I am a simple home owner. Do your own analysis for your specific financial situation and even consult a professional and accredited financial professional just to be sure of your own number.

While I know a thing or two about finances because of my educational and professional background, I did not do this analysis alone. I asked my good friend Harvey, who went with me to South Bend, Indiana last week to visit the University of Notre Dame (more on that in a few days) as well as Andrew McCormack of Solsmart to take a detailed look at my analysis. Both Harvey and Andrew pointed out some strategy considerations in the calculations and a few glitches in the formulas within the spreadsheet. Harvey is a good friend whereas I just met Andrew a few weeks ago. And no, I have not signed with any microFIT installation vendor, so that was really very nice of him to spend so much time with me on this analysis.

Now, based on the numbers and assumptions from the prior article in this microFIT vs RRSP series, what is the PRE-TAX balance in the RRSP / SRSP account 20 years after  investing the $43,000 (representing the cost of a solar PV roof mount system on our house from the microFIT quote I received) instead into an RRSP or SRSP and then using the resultant income tax refund as the RRSP / SRSP contribution in the following year?

  • $159,200! (net of interest cost of my bank loan for the initial investment)

The $159,200 amount represents:

  • $43,000 initial contribution
  • $24,700 of subsequent RRSP refunds and re-contributions over 5 years based on the initial contribution (the beauty of RRSP / SRSP tax saving vehicle)
  • $91,500 of income earned in the RRSP / SRSP from investing in Provincial strip bonds currently returning approximately 4.5% per year, compounded.

Have some fun, create your own Excel spreadsheet using the numbers from this and the prior article in this series and see what results you achieve. Then do the same for your particular situation.

Now, not quite finished.

Remember RRSP / SRSP balances need to be withdrawn at some point. Typically, they are withdrawn upon retirement a little at a time, combined with rolling RRSP balances into RRIF’s (Registered Retirement Income Funds) which have annual minimum withdrawal requirements.

In either case, such funds are withdrawn typically when the individual is retired and has no / little employment income. This means that personal income tax rate is typically lower during retirement than during working years. But, what will your personal income tax rate be when you withdrawal these funds? It is hard to know something so finite so far into the future, isn’t it?

Consider the following after tax amounts of the above $159,200 pre-tax RRSP / SRSP account based on different Income Tax rates:

Income Tax Rate         After Tax Amount

  • 45%                               $  87,600
  • 40%                               $  95,500
  • 35%                               $103,500
  • 30%                               $111,400
  • 25%                               $119,400

Four of the above five After Tax amounts exceed the $88,300 after tax total of microFIT income + Residual value of the solar panel installation at the end of the 20 year microFIT contract per the first part of this two part article.

However, we are not done yet. Don’t jump to your conclusion just yet.

What are you going to do with the annual net amount of microFIT revenue? What if each year you contributed the annual amount of microFIT income, net of the monthly account fee, additional insurance, loan interest, etc., to an RRSP or SRSP? That amount would earn income wouldn’t it? Yes, it would.

And, just like the above analysis did for a pure RRSP investment, what if you invested the income tax refund received annually from contributing all microFIT net income into this year’s RRSP as part of the next year’s RRSP contribution? See where I am going with this?

I created another spread sheet to calculate how much income at the end of Year 20 I could earn investing the net monthly amount received from the sale of the electricity my microFIT roof mount solar PV installation would generate. Based on using the same 4.5% return for the same first 6 years as was done under the pure RRSP scenario followed by 2% thereafter (to be conservative) I calculated that the balance in my RRSP at the end of year 20 could conservatively approximate:

  • $190,200!

And, if I go with the solar panel route at the end of year 20 I still have functioning solar panels on my roof!

Interesting.

Lastly, some further implications / considerations of investing in RRSP / SRSP or a microFIT roof mount solar PV installation:

  • the balances of either option above (pure RRSP or microFIT) actually are low because they do not include, but should, continual income to be earned after year 20 because the balance in my RRSP account would not be withdrawal at once but over several years
  • microFIT installations have additional income tax (and possibly HST for those so inclined) reporting tasks each year; not so with the RRSP / SRSP option
  • microFIT installations carry the risk of kW production estimates provided by installation vendor quotations not being realized; not so with the RRSP / SRSP alternative of investing in Provincial strip bonds where the interest rate is fixed for the duration of the investment as secure as one could typically find
  • microFIT installations carry a wide variety of hardware risks (minor), production reductions due to possible hardware failures (minor), etc.; again, these risks are not applicable at all to the RRSP / SRSP alternative … the only risk you have is if the Province who’s strip Bond you purchased in your RRSP itself went bankrupt (have there been any Canadian provinces going bankrupt lately?)
  • microFIT installations will continue to generate revenue after the 20th year, but your guess on the rate that the Ontario Power Authority will offer is as good as anyone’s guess ….. at the lower production rates of 20+ year old solar panels; the only revenue under the RRSP / SRSP alternative is from the RRSP / SRSP investments
  • Investing RRSP contributions in Provincial Government strip bonds carry none of the above noted microFIT annual reporting tasks, annual production / revenue risks, hardware risks
  • What if you have to sell the house at some point during the 20 year microFIT contract? Will you truly receive the proper value for your solar panel investment? How do you know for sure? This risk is non-existant under the pure RRSP / SRSP investment alternative.

Now what do you think about microFIT vs RRSP from a pure financial return perspective? Our numbers of the balance in the RRSP / SRSP account in 20 years were $159,200 for the pure RRSP / SRSP alternative vs $190,200 for the microFIT investment alternative. Does the above analysis at least make you aware that there may be an alternative to the microFIT program for your hard earned discretionary income?

Do your own financial analysis, use your own assumptions and work with a qualified financial and income tax professional.

And yes, if you want a copy of the Excel worksheet I used just send me an email (Dan@DailyHomeRenoTips.com).

So, after all that, what is my own conclusion in the microFIT vs RRSP debate? No. Select this link to learn about two additional considerations in the microFIT vs RRSP debate.

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