Ty1 is a retrovirus-like retrotransposon whose replication is influenced by diverse cellular processes in Saccharomyces cerevisiae. We have identified cytoplasmic P-body components encoded by DHH1, KEM1, LSM1, and PAT1 as cofactors that posttranscriptionally enhance Ty1 retrotransposition. Using fluorescent in situ hybridization and immunofluorescence microscopy, we found that Ty1 mRNA and Gag colocalize to discrete cytoplasmic foci in wild-type cells. These foci, which are distinct from P-bodies, do not form in P-body component mutants or under conditions suboptimal for retrotransposition. Our immunoelectron microscopy (IEM) data suggest that mRNA/Gag foci are sites where virus-like particles (VLPs) cluster. Overexpression of Ty1 leads to a large increase in retrotransposition in wild-type cells, which allows VLPs to be detected by IEM. However, retrotransposition is still reduced in P-body component mutants under these conditions. Moreover, the percentage of Ty1 mRNA/Gag foci and VLP clusters and levels of integrase and reverse transcriptase are reduced in these mutants. Ty1 antisense RNAs, which have been reported to inhibit Ty1 transposition, are more abundant in the kem1Delta mutant and colocalize with Ty1 mRNA in the cytoplasm. Therefore, Kem1p may prevent the aggregation of Ty1 antisense and mRNAs. Overall, our results suggest that P-body components enhance the formation of retrotransposition-competent Ty1 VLPs.