Abstract Emotion’s selective effects on memory go beyond the simple enhancement of threatening or rewarding stimuli. They can also rescue otherwise forgettable memories that share overlapping features. Here, we use functional magnetic resonance imaging (fMRI) to examine the brain mechanisms that support this retrograde memory enhancement. In a two-phase incidental encoding paradigm, participants first view images of neutral tools and animals. During Phase 1, these images are intermixed with neutral scenes, which provides a unique ‘context tag’ for this specific phase of encoding. A few minutes later, during Phase 2, new pictures from one category are paired with a mild shock (fear-conditioned stimulus; CS+), while pictures from the other category are not shocked. fMRI analyses reveal that, across participants, retroactive memory benefits for Phase 1 CS+ items are associated with greater phasic reinstatement of the prior mental context during Phase 2 CS+ items. We also see that greater VTA/SN activation during Phase 2 CS+ items relates to this retroactive memory enhancement, suggesting that emotion promotes both the encoding and ongoing consolidation of overlapping representations. Additionally, we find that emotional experience-dependent changes in post-encoding hippocampal functional coupling with CS+ category-selective cortex relate to the magnitude of the retroactive memory effect. These hippocampal connectivity patterns also mediate the relationship between dopaminergic emotional encoding effects and across-participant variability in the retroactive memory benefit. Collectively, our findings suggest that an interplay between online and offline brain mechanisms may enable emotion to preserve seemingly mundane memories that become significant in the future.