Bifunctional magneto-optical nanocomposites with Fe3O4 nanoparticles as a core and erbium and lithium codoped gadolinium (Gd2O3:Er3+, Li+) as the shell were synthesized successfully using a simple urea homogeneous precipitation method. The fabricated Fe3O4@Gd2O3:Er3+, Li+ particles were characterized by X-ray diffraction, field emission scanning electron microscopy, transmission electron microscopy, photoluminescence spectroscopy and quantum design vibrating sample magnetometry. The upconversion emission intensity was enhanced significantly comparing to that without Li+ ions. These bifunctional composites are expected to be potentially applied for drug delivery, cell separation and bioimaging.