Recently, magnesium alloys attract much more attention as the biomedical metallics. Unfortunately, due to their low strength, the implantation materials of Mg alloys are prone to collapse and fracture during the in-vivo/vitro service, which seriously endangers the life-safety of patients. Rare-earth micro-alloying is an effective method to enhance the mechanical properties of degradable Mg-based alloys, which cannot only eliminate the impurities and purify the melt, but also promote the dynamic recrystallization and form the long period stacking ordered phase structure. Therefore, based on the correlations between mechanical properties and microstructure transformation of Mg alloys, the research progress on the microstructure and mechanical properties of rare-earth Mg alloys was reviewed. The essential correlations among the rare-earth elements, the secondary phases, and the mechanical properties of Mg alloys were investigated. Additionally, the strengthening and toughening mechanisms of the continuous dynamic recrystallization of medical rare-earth Mg alloys were clarified. Besides, the effect of long-period stacking ordered structure induced by rare-earth elements on the mechanical properties of Mg alloys was comprehensively summarized. Finally, the development directions of medical rare-earth Mg alloys was proposed.