Significance Phase separation of proteins is increasingly thought to play a fundamental role in biological processes. Recent studies show that tau protein phase separates, but the biological significance is unknown since artificial crowding agents are typically used and the resulting tau is not toxic. We now demonstrate that TIA1 potentiates RNA-mediated phase separation of tau, thereby enabling a process that occurs at physiological concentrations and also directs the formation of biologically active, highly neurotoxic oligomeric tau. Coordinated phase separation of functionally related proteins provides a general mechanism through which membraneless organelles can direct biological activities.