Working memory (WM) is impaired in psychotic disorders and linked to functional outcome. Most neurobiological models emphasize prefrontal cortex (PFC) dysfunction in the etiology of WM impairment. However, WM is composed of multiple processes, including encoding and maintenance, and the delineation of the neurobiology of these sub-processes has not been well characterized in schizophrenia and psychotic bipolar disorder. Functional MRI was obtained during an event-related spatial delayed match-to-sample task from 58 healthy individuals, 72 individuals with schizophrenia and 41 people with bipolar I disorder with psychotic features in order to: 1) characterize neural responses during encoding, maintenance and retrieval stages of WM using complementary region-of-interest and whole brain approaches; 2) determine whether schizophrenia and psychotic bipolar disorder exhibit similar abnormalities in WM-related brain function; and 3) elucidate the associations between WM-related brain function, task performance, and neuropsychological functioning. Both schizophrenia and psychotic bipolar disorder groups showed encoding- and maintenance-related impairments in the posterior parietal cortex (PPC) and frontal eye fields (FEF). BOLD response in the PPC and FEF, during encoding and maintenance respectively, was associated with task performance independent of group. Additionally, encoding-related activation in the PPC correlated with general neuropsychological functioning independent of group. Only encoding-related activation in the right ventral striatum differed between schizophrenia and psychotic bipolar disorder; individuals with schizophrenia showed significantly lower activation than both psychotic bipolar disorder and healthy groups. Our results are consistent with emerging evidence implicating PPC dysfunction in WM impairment and suggest interventions targeting neural activation in PPC may improve WM and neuropsychological functioning across psychotic disorders.