Bone Morphogenetic Proteins (BMPs) have multiple activities in the developing spinal cord: they specify the identity of the dorsal-most neuronal populations and then direct the trajectories of dorsal interneuron (dI) 1 commissural axons. How are these activities decoded by dorsal neurons to result in different cellular outcomes? Our previous studies have shown that the diverse functions of the BMPs are mediated by the canonical family of BMP receptors and then regulated by specific inhibitory (I) Smads, which block the activity of a complex of Smad second messengers. However, the extent to which this complex translates the different activities of the BMPs in the spinal cord has remained unresolved. Here, we demonstrate that the receptor-activated (R) Smads, Smad1 and Smad5 play distinct roles mediating the abilities of the BMPs to direct cell fate specification and axon outgrowth. Smad1 and Smad5 occupy spatially distinct compartments within the spinal cord, with Smad5 primarily associated with neural progenitors and Smad1 with differentiated neurons. Consistent with this expression profile, loss of function experiments in mouse embryos reveal that Smad5 is required for the acquisition of dorsal spinal neuron identities whereas Smad1 is critical for the regulation of dI1 axon outgrowth. Thus the R-Smads, like the I-Smads, have discrete roles mediating BMP-dependent cellular processes during spinal interneuron development.