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This study examines racial differences in psychological distress during COVID-19, focusing on stressor exposure and neighborhood engagement. Black and Asian respondents exhibited lower distress than Whites despite higher stress, consistent with the Black–White mental health paradox and extending it to other racial groups. Neighbor engagement strongly buffered stress effects for Black and Asian participants, highlighting the protective role of community ties, while Whites’ distress tracked more directly with stress exposure. Hispanic respondents showed weaker neighborhood-based protections. These findings indicate that paradoxical resilience reflects access to and use of social resources. By demonstrating the moderating power of neighborhood interaction, the paper underscores that fostering community cohesion is central to mitigating mental health disparities and promoting collective well-being during public health crises.