Learning to respond to others' distress with well-regulated empathy is an important developmental task linked to positive health outcomes and moral achievements. However, this important interpersonal skill set may also confer risk for depression and anxiety when present at extreme levels and in combination with certain individual characteristics or within particular contexts. The purpose of this review is to describe an empirically grounded theoretical rationale for the hypothesis that empathic tendencies can be “risky strengths.” We propose a model in which typical development of affective and cognitive empathy can be influenced by complex interplay among intraindividual and interindividual moderators that increase risk for empathic personal distress and excessive interpersonal guilt. These intermediate states in turn precipitate internalizing problems that map onto empirically derived fear/arousal and anhedonia/misery subfactors of internalizing disorders. The intraindividual moderators include a genetically influenced propensity toward physiological hyperarousal, which is proposed to interact with genetic propensity to empathic sensitivity to contribute to neurobiological processes that underlie personal distress responses to others' pain or unhappiness. This empathic personal distress then increases risk for internalizing problems, particularly fear/arousal symptoms. In a similar fashion, interactions between genetic propensities toward negative thinking processes and empathic sensitivity are hypothesized to contribute to excess interpersonal guilt in response to others' distress. This interpersonal guilt then increases the risk for internalizing problems, especially anhedonia/misery symptoms. Interindividual moderators, such as maladaptive parenting or chronic exposure to parents' negative affect, further interact with these genetic liabilities to amplify risk for personal distress and interpersonal guilt as well as for consequent internalizing problems. Age-related increases in the heritability of depression, anxiety, and empathy-related constructs are consistent with developmental shifts toward greater influence of intraindividual moderators throughout childhood and adolescence, with interindividual moderators exerting their greatest influence during early childhood. Efforts to modulate neurobiological and behavioral expressions of genetic dysregulation liabilities and to promote adaptive empathic skills must thus begin early in development.