Transgender and gender diverse (TGD) individuals are often in a position where they face difficult and complex decisions about revealing their identity to others. Such revelations, referred to as “coming out,” have been suggested to have ambivalent relationships with mental health depending on circumstantial and environmental factors. To explore how negative (gender-identity related discrimination) and positive (community connectedness) environmental factors may influence the relationship between outness and psychological distress, data collected from a cross-sectional sample of TGD participants (N = 342) were analyzed to assess connections between outness, gender-related discrimination, community connectedness, and psychological distress. Using principles of decomposition and counterfactual frameworks, a mediation model was constructed to assess the direct effect of outness on psychological distress once accounting for indirect effects of outness on psychological distress as mediated by discrimination. To determine how this direct effect varied depending on the level of community connectedness, a follow-up moderated mediation model was constructed. Analyses showed a significant direct effect of outness on psychological distress after removing indirect effects, b = −.48, 95% CI [−.80, −.17]. This direct effect appeared greatest for those with moderate (b = −.39, 95% CI [−.76, −0.2]) and high (b = −1.31, 95% CI [−2.17, −.47]) levels of community connectedness. The relationship between outness and decreased psychological distress is one that appears to be highly influenced by environment into which one reveals their gender identity. Community and policy-focused interventions may ameliorate the mental health disparities faced by TGD populations.