The theta band is one of the most prominent frequency bands in the electroencephalography (EEG) power spectrum, and presents an interesting paradox: On the one hand, children and adolescents who exhibit higher theta power during resting state tend to have lower cognitive abilities. On the other hand, task-related EEG research has consistently found positive associations between theta power during cognitive tasks and behavioral performance. Why does theta power, measured during resting state versus cognitive tasks, exhibit distinct correlations with cognitive functioning? This review provides a coherent account of the functional properties of theta across contexts. We first present evidence that higher theta power during resting state predicts lower executive functioning, attentional abilities, language skills, and IQ. Next, we review research showing that theta activity plays a crucial role in memory, attention, and cognitive control, and that higher theta power during cognitive tasks predicts better behavioral performance. Finally, we discuss potential explanations for the differential correlations between resting/task-related theta and cognitive functioning, and propose future directions for clarifying these relations.