Personality traits have been reported to predict difficulties in performing instrumental activities of daily living (IADL) in old age, such as preparing meals or shopping. However, little is known about the reciprocal effects on personality. In this study, we examined bidirectional relationships between personality traits and the capacity to perform IADL using four waves of longitudinal data from 3540 older adults (aged 65 years and older) from the Health and Retirement Study. We applied a random-intercept cross-lagged panel model to separate between- and within-person effects across time and compared it to a traditional cross-lagged panel model. At the between-person level, higher neuroticism and lower conscientiousness were associated with more IADL limitations. Within individuals across time, increases in neuroticism and decreases in conscientiousness and extraversion were associated with increases in IADL limitations 4 years later. In contrast, increases in IADL limitations only predicted increases in neuroticism and decreases in extraversion. These results indicate that some personality traits affect and are affected by limitations in functional capacities in old age. Results of the within-person model build a strong foundation for future personality interventions as a pathway to maintain high functioning in old age.