Al-Fe alloy containing nanosized Al13Fe4 phase was fabricated by the solid-state multiple pass friction stir alloying (FSA) technique and subjected to heat treatment at different time-temperature conditions. During annealing, the diffusion of Fe atoms leads to the necking and fragmentation of the coarse plate shape Al13Fe4 IMC phase resulting in its spheroidization. However, as the annealing time is extended, the spheroidized Al13Fe4 phase undergoes coarsening and grows predominantly along a specific plane. This growth process transforms the originally spherical shape into an elliptical or small plate-like morphology. The grain size was insignificantly affected by the annealing time and temperature owing to the grain boundary pinning by the nanometric-sized IMC phase. The ultimate tensile strength of the Al-Fe alloy (149 MPa) is improved significantly at the annealing conditions of 200 °C/4hrs (165 MPa), 200 °C/6hrs (167 MPa), and 300 °C/2hrs (163 MPa). The improved UTS is attributed to the increased isotropic work hardening owing to the reduced IMC particle size and mean interparticle spacing in the Al-Fe alloy. The lowest work hardening rate is observed in the specimen annealed at 200 °C for 2 hrs (largest particle size) which is attributed to the stored energy in the material due to severe plastic deformation (SPD) associated with the FSA. The correlation between the work hardening rate, IMC particle size, and mean interparticle spacing at various annealing conditions are established.