Schizophrenia and bipolar disorder are complex psychiatric disorders that present unique challenges in the study of disease biology. There are no objective biological phenotypes for these disorders, which are characterized by complex genetics and prominent roles for gene-environment interactions. The study of the neurobiology underlying these severe psychiatric disorders has been hindered by the lack of access to the tissue of interest - neurons from patients. The advent of reprogramming methods that enable generation of induced pluripotent stem cells (iPSCs) from patient fibroblasts and peripheral blood mononuclear cells has opened possibilities for new approaches to study relevant disease biology using iPSC-derived neurons. While early studies with patient iPSCs have led to promising and intriguing leads, significant hurdles remain in our attempts to capture the complexity of these disorders in vitro. We present here an overview of studies to date of schizophrenia and bipolar disorder using iPSC-derived neuronal cells and discuss potential future directions that can result in the identification of robust and valid cellular phenotypes that in turn can lay the groundwork for meaningful clinical advances.