Income inequality is commonly posited to elevate concerns about social status that undermine psychological health, but the empirical evidence is inconsistent. Here we propose that these inconsistencies conceal opposing processes: Income inequality prompts perceived competitiveness, which can both negatively predict psychological health via avoidance motivation and positively predict psychological health via approach motivation. First, we conducted a two-year longitudinal study (1,700+ participants from 500+ county identifiers) and provided support for our opposing processes model. Second, we conducted three pre-preregistered studies using an experimental-causal-chain design. We sequentially showed that induced income inequality increased perceived competitiveness (Study 2a; 444 participants), induced perceived competitiveness increased avoidance and approach motivation (Study 2b; 1,018 participants), and induced avoidance/approach motivation decreased/increased psychological health (Study 2c; 562 participants). These findings suggest that scholars should shift from studying the main effects of income inequality on psychological health to studying the psychological processes involved in the inequality-health relation.