BACKGROUND/OBJECTIVES Although there is a strong cross‐sectional association between dependence in activities of daily living (ADLs) and decreased mental health, it is largely unknown how the loss of specific ADLs, or the combination of ADLs, influences mental health outcomes. We examined the effect of ADL independence on mental health among participants in a large survey of Medicare managed care recipients. DESIGN/SETTING Retrospective cohort study. PARTICIPANTS A total of 104,716 participants in cohort 17 of the Medicare Health Outcomes Survey, who completed the baseline and follow‐up surveys in 2014 and 2016. MEASUREMENTS Linear regression models estimated the effects of loss of ADL independence on change in Mental Component Summary (MCS) score. RESULTS In an adjusted model, loss of independence in eating, bathing, dressing, and toileting were associated with three‐ to four‐point declines in MCS, suggesting meaningful worsening. In a model that also included all six ADLs, loss of independence in each ADL was associated with declines in MCS, with the largest effects for eating and bathing. MCS decreased by 1.3 per each additional summative loss of ADL independence (P < .001). CONCLUSION Loss of ADL independence was associated with large declines in mental health, with personal care activities showing the largest effects. Additional research can help to characterize the causes of ADL loss, to explore how older adults cope with it, and to identify ways of maximizing resilience. J Am Geriatr Soc 68:1301–1306, 2020.