The ambient strength-ductility trade-off has been a long-standing dilemma in metallic alloys, in particular Mg alloys. Here we report a new strategy to solve such a strength-ductility dilemma in precipitation-strengthened Mg-Gd alloys via Li addition. Different from the strengthening of traditional β′ phase in Mg-7Gd (wt%) alloy, 1 wt% Li addition to this alloy not only boosts the precipitation of different sized β, β1R, βH−II′ phases and Li clusters to offer better combined strengthening effect, but also enhances the activity of <c+a> dislocations to accommodate the strains during plastic deformation. Consequently, both the ambient tensile yield strength and ductility are simultaneously improved as compared to Mg-7Gd (wt%) alloy. Moreover, Li addition brings a reduction in density, in turn increasing the specific yield strength. The present strategy with Li addition offers a new insight into the development of Mg alloys with high strength-ductility synergy and with high specific yield strength.