Background Although persons with subthreshold depression or anxiety are known to be at risk for full-syndromal disorders, little is known about their functioning over time. In this study, we investigate the functional impairment of persons with subthreshold depression or anxiety over time, compared to that of controls. Furthermore, we evaluate which illness, personal, and environmental risk factors influence its course. Methods Data come from the Netherlands Study of Depression and Anxiety (N = 1,266, aged 1865). Linear mixed models were used to identify predictors of functional impairment at baseline, 1-, and 2-year follow-up. Risk factors were evaluated in their overall effect on functioning and on change in functioning over time, and whether they differed for respondents with and without subthreshold depression or anxiety. Results Functional impairment in subthreshold respondents improved over time, but remained much higher than in controls. Prior anxiety disorder, high neuroticism, low conscientiousness, more somatic conditions, and more childhood trauma all predicted greater functional impairment. Older age predicted lower functioning only in subthreshold respondents, while the effect of neuroticism was stronger in subthreshold respondents relative to controls. Conclusions Functional impairment in subthreshold respondents improved over time, but remained elevated compared to that of controls. Given continuously elevated levels of impairment, preventive interventions should be focused on persons with subthreshold symptoms; in particular those with prior anxiety disorder, high neuroticism, low conscientiousness, somatic conditions, or childhood trauma.