By Scott Burns

Q: My son has just accepted a position at a federal agency. He is in the process of establishing his Thrift Savings Plan. As you are probably aware, there are five funds within the Thrift Savings Plan in which to invest: (1) a government securities fund, (2) a fixed-income fund that duplicates Lehman Bros. Bond Index fund, (3) a common stock index fund that duplicates the S&P 500 Index, (4) a small-cap index fund that duplicates the Dow Jones Wilshire 4500 and (5) an international stock index fund that is compiled of stocks of 21 countries.

What distribution among these investment opportunities would you recommend for the current economic environment? -- W.B., by e-mail

A: Recommendations for the current economic environment must also be conditioned by the age of the investor and the employment stability of the investor. A young government employee can generally assume a long period of saving, income stability, and a defined-benefit pension and Social Security in addition to retirement savings. That employee can take a good deal more risk than a person of the same age who works for a private company without a defined-benefit pension plan (most young workers).

In the proud tradition of Couch Potato investing, your son could divide his contributions equally between the Lehman Bond Index fund for fixed-income, the S&P 500 Index fund for large cap domestic stocks, the small cap index fund for small cap domestic stocks and the international stock index for international stocks. This would make his portfolio 75 percent equities, 25 percent fixed-income.

It would also give him a hefty slug of small cap risk since the S&P 500 Index accounts for about 75 percent of all domestic equity value. In his portfolio, large cap would be only half of domestic equities and small cap would, in effect, be overweighted.

The biggest shortcoming of this portfolio is that it is underweighted in international equities since the entire U.S. market is roughly equal in value to the total value of all international and emerging market stocks. It shares this shortcoming with the complete portfolios, known as "L" funds, which are also available through the Thrift Savings Plan -- all contain more than $2 of domestic equities for each $1 of international equities. Your son could correct this by building a slightly more complicated portfolio that was composed of 4 parts international, 3 parts U.S. large cap, 1 part U.S. small cap, and 2 parts Lehman Bond Index. This portfolio would be 80 percent equities, and 20 percent fixed-income with equal weights for U.S. and international equities.

Would either allocation be ideal or prescient? Sorry, no. We don't know the future. But both portfolios would be diversified and allocated at a risk level appropriate to a young man with stable employment and good benefits.

Q: I'm confused as to whether the upcoming "Roth conversion window" in 2010 will be of any value to folks in my situation. I'm 62 and will retire whenever my employer decides they have no further use for me. So I will have a need to start drawing from my retirement accounts in the next several years. I have about a million dollars in a combination of traditional 401(k) and IRA accounts. I have no Roth accounts, as I've never met the income requirements.

Is there any advantage to converting any of my traditional holdings to a Roth? It appears to me that a conversion would exaggerate my marginal tax rate in 2010 and 2011. It would also substantially reduce my principal. If I were to stand pat, my guess is that my tax rate would be less on the traditional distributions over the coming years (even given the threat of increasing taxes). Plus, I would have a larger principal balance to grow tax-free during the early years of the recovery. Am I missing something? -- H.A., Dallas

A: I think you sized up the situation pretty well. Conversion for many people will bump them into a higher tax bracket than they are in now and a higher tax bracket than they will be in when retired. More important, while the drums are beating with fear of much higher tax rates in the future, history suggests that our tax burden is a lot more stable than most people think. Basically, tax collections have averaged about 20 percent of GDP for half a century. Who pays the taxes shifts with political power and fashion, but the basic tax burden is pretty stable.

Unless you can figure out a concrete personal benefit, continued tax deferral is the better course.