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The paradox that African Americans experience relatively good mental health despite being exposed to negative racial stereotypes and other stressors remains unexplained. The present study investigates the possibility that two dimensions of racial identity—ingroup closeness and ingroup evaluation—help explain these puzzling findings. African Americans’ racial identity tends to be positive, and it is associated with higher self-esteem and mastery and a lower likelihood of depression. Using data from the Collaborative Psychiatric Epidemiology Surveys (CPES), we show that African Americans who feel close to other African Americans and those who evaluate African Americans positively have greater self-esteem and mastery and a lower likelihood of depression and anxiety than whites. Without a positive racial identity, African Americans’ mental health would be the same or worse than that of whites. We conclude that racial identity partly explains how African Americans enjoy relatively good mental health, despite greater exposure to negative racial stereotypes, discrimination, and other stressors.