In the backdrop of a spatial effect, this paper reconsiders the importance of life cycle in explaining the evolution of regional household income inequality in Taiwan. For the empirical period examined (1998–2006), a fixed effect panel data analysis reveals a high level of spatial clustering across 22 regions of Taiwan. When we control for spatial dependence we observe a positive relation between aging and income inequality. This regional inequality is explained by a decline in the multigenerational families followed by a rise in the elderly households with no additional income. Further, the level of inequality in income distribution of own province is positively and significantly determined by inequality in the neighboring province. To investigate further the process of regional development in Taiwan, we analyze the convergence–divergence dynamics employing spatial econometric methods. We observe both absolute and conditional beta divergence. The result points to the famous catching up or falling behind phenomenon. Failure to account for such spatial effect may cause biased results and incorrect policy implications.