On Christmas Eve 1945, in Bedford Falls, New York, George Bailey contemplates suicide. The prayers of his family and friends reach Heaven, where guardian angel second class Clarence Odbody is assigned to save George in order to earn his wings. Clarence is shown flashbacks of George's life. He watches 12-year-old George rescue his younger brother Harry from drowning, leaving George deaf in his left ear. George later saves the pharmacist, Mr. Gower, from accidentally poisoning a customer.
In 1928, George plans a world tour before college. He is reintroduced to Mary Hatch, who has loved him since childhood. When his father dies from a sudden stroke, George postpones his travel to settle the family business, Bailey Brothers Building and Loan. Avaricious board member Henry Potter, who owns the bank and most of the town, seeks to dissolve the company, but the board of directors votes to keep it open on condition that George run it. George acquiesces and works alongside his uncle Billy, giving his tuition savings to his younger brother Harry with the understanding that Harry will take over when he graduates.
However, Harry returns from college married and with a job offer from his father-in-law, and George resigns himself to running the building and loan. George and Mary rekindle their relationship and marry, and use their honeymoon savings to keep the company solvent during a run on the bank. Under George, the company establishes Bailey Park, a housing development surpassing Potter's overpriced slums. Potter entices George with a high-paying job, but George rebuffs him when he realizes that Potter's true intention is to close the building and loan.
On Christmas Eve, the town prepares a hero's welcome for Harry, a Navy fighter pilot awarded the Medal of Honor for preventing a kamikaze attack on a troopship. Billy goes to Potter's bank to deposit $8,000 of the building and loan's money. He taunts Potter with a newspaper headline about Harry, then absentmindedly wraps the cash in Potter's newspaper. Potter finds and keeps the money, while Billy cannot recall how he misplaced it. With a bank examiner reviewing the company's records, George fruitlessly retraces Billy's steps. Frustrated and angered by Billy’s blunder, which may lead to scandal and jail, George resents the sacrifices he has made and the family that has kept him trapped in Bedford Falls. He appeals to Potter for a loan, offering his meager life insurance policy as collateral. Potter scoffs that George is worth more dead than alive, refuses to help, and phones the police.
George flees Potter's office, gets drunk at a bar, and prays for help. Contemplating suicide, he goes to a nearby bridge. Before George can jump, Clarence dives into the freezing river and George rescues him. When George wishes he had never been born, Clarence shows George a timeline in which he never existed. Bedford Falls is now Pottersville, an unsavory town occupied by sleazy entertainment venues and callous people. Mr. Gower was jailed for manslaughter because George was not there to stop him from poisoning the customer. George's mother does not know him. Uncle Billy was institutionalized after the building and loan failed. Bailey Park is a cemetery, where George discovers Harry's grave: Without George, Harry had drowned as a child, and without Harry to save them, the troops aboard the transport ship were killed. George finds that Mary is an "old maid" librarian. When he grabs her and claims to be her husband, she screams and runs away.
George flees back to the bridge and begs for his life back. His wish granted, he rushes home to await his arrest. Meanwhile, Mary and Billy have rallied the townspeople, who donate more than enough to replace the missing money. Harry arrives and toasts George as "the richest man in town." Among the donations George finds a copy of The Adventures of Tom Sawyer, a gift from Clarence inscribed, "Remember, no man is a failure who has friends. Thanks for the wings!" When a bell on the Christmas tree rings, George's youngest daughter, Zuzu, explains that "every time a bell rings, an angel gets his wings."
