Compared to young, older adults are more likely to forget events that occurred in the past as well as remember events that never happened. Previous studies examining false memories and aging have shown that these memories are more likely to occur when new items share perceptual or semantic similarities with those presented during encoding. It is theorized that decreased item-specific encoding and increased gist encoding contribute to these age differences in memory performance. The current study used a modified version of the Deese-Roediger-McDermott (DRM) paradigm to investigate the neural correlates of true and false memory encoding. Results indicated that, compared to young, older adults showed reduced activity in medial temporal lobes (MTL), left ventrolateral prefrontal cortex (VLPFC), and visual cortices associated with subsequent true memories. Despite these decreases older adults showed increased activity in right VLPFC and left superior temporal gyrus (STG) for subsequent true memories. Age-related increases in STG were also associated with subsequent false memories. Results support the theory that older adults engage in less item-specific encoding and greater gist encoding, and that these increases in gist encoding support both subsequent true and false memories. Furthermore, results extend findings of reduced frontal asymmetry in aging, often found in block designs, to the subsequent memory paradigm. Results suggest that greater bilateral frontal activity during encoding in aging are not just task-related, but may be associated with subsequent successful memory performance.