Terminal differentiation is the process by which neurons permanently exit the cell cycle and express a distinct set of genes that determines their final identity. However, the factors that drive terminal differentiation in vertebrate neurons have largely remained elusive. Now, Marta Wiśniewska and colleagues describe the role of TCF7L2, a mouse transcription factor, the human homologue of which has been implicated in the prevention of autism and schizophrenia, in the terminal differentiation of prosomere 2 neurons (which give rise to thalamic and habenular neurons). They find that Tcf7l2 knockout embryos display abnormalities in the anatomy and neuronal connectivity of the thalamus and habenula, although neurogenesis is unaffected. Late gestation (E18.5) mouse embryos lacking Tcf7l2 show misexpression of prosomere 2-specific transcription factors and genes involved in axon guidance and cell migration. The authors further demonstrate that, postnatally, TCF7L2 is required for the expression of genes involved in the electrophysiology of post-mitotic thalamic neurons, such as voltage-gated ion channels. Accordingly, thalamic neurons in conditional Tcf7l2 knockout mice exhibit severely impaired electrophysiological responses. Lastly, the authors reveal that TCF7L2 binds to genes conferring terminal identities within the thalamus of adult mice. Collectively, these findings suggest that TCF7L2 drives terminal differentiation in prosomere 2 neurons and provide mechanistic insight as to why loss of Tcf7l2 may lead to psychiatric disorders.