Covington is a 19th-century Pennsylvania village that is isolated from the rest of the world. The woods that surround the village are off limits to all the villagers because mysterious creatures live there. Many years earlier, the town elders and the creatures reached an understanding that the villagers would not go into the woods, and the creatures would not enter the village. A boundary was set up around the village, along with warnings on etiquette and colors to wear regarding keeping the creatures at bay.
After one of the elders named August Nicholson (Brendan Gleeson) loses his son to an untreatable disease, one of the town's young people named Lucius Hunt (Joaquin Phoenix) goes to the village elders, and requests to leave the village and travel to "the towns," in hopes of finding medicines and other remedies that may prevent further losses, or possibly cure the mental ailments of one of the town's other young persons, named Noah Percy (Adrien Brody). His request is quickly denied by the village elders.
Lucius himself is considered a rather strange young man by the village. He keeps to himself, rarely speaking to most people. When Kitty Walker (Judy Greer) comes to Lucius in hopes he will marry her, he refuses her request. Lucius has been childhood friends with Kitty's youngest sister, named Ivy (Bryce Dallas Howard). Blind since she was very young, Ivy claims that Lucius has a 'color' around him, that she can sense. One day, while in a small area near the border to the woods, Noah presents Ivy with some red berries. They do not grow in the village, and Lucius believes that Noah has travelled into the woods, and has not been harmed by the creatures in it. This causes Lucius to grow more determined, and he again goes to the elders to request again to travel to "the towns." Lucius believes that if the creatures allowed Noah into the woods without causing him harm, they will do the same to him.
Lucius' second request is denied, and his mother Alice Hunt (Sigourney Weaver) advises him to stay home and forget about the outside world, claiming it to be a dangerous place that took the life of his father. Upset by these proclamations, Lucius explains that he sees that his mother eyes Ivy Walker's father Edward (William Hurt) in a 'certain way,' even though he is married. Lucius also makes note of a black wood box that his Mother has, which is locked. Each of the elders has a box, that contains remnants of the elder's pasts before they established Covington. Lucius wants his mother to open the box and reveal her past secrets, but she refuses this as well.
The next day, Lucius has patrol duty along the borders of the village. Unseen by the others, he steps over the boundaries, and wanders a ways into the woods. The sound of something nearby catches his attention, but all that is there when he looks are some wavering branches. Later that evening, Lucius visits the Walkers' house, where he has a conversation with Ivy. Ivy explains that in the time that has passed, her sister has decided to marry another young man in the town. Ivy says that Lucius is brave for wanting to go beyond the village, but she feels his actions are unwise. Before Lucius leaves, Ivy informs him that now that her sister is to be married, she is free to have suitors court her.
Shortly thereafter, the alarm is sounded, and the creatures in the woods are said to have entered the village. Lucius returns to the Walker's residence, where he manages to get Ivy into the house before she is attacked by one of the creatures.
The next morning, red marks are found slashed across many of the doors in town. A town meeting is held, to which Edward Walker explains that he feels the creatures feel threatened. Lucius comes forward, claiming that his trespass into the woods beyond the borders was most likely what brought the creatures into the village. Lucius is ashamed at what has happened, but even so, Edward praises that he is a very brave young man.
Sometime afterward, a celebration is held for the marriage of Kitty Walker and Christop Crane (Fran Kranz). During a lively dance, children's screams are heard, and several report that some of the creatures have returned to the village. The party is called off, as the villagers find skinned animals hung above the porches of several houses. This action on the part of the creatures causes the elders to grow concerned, and extra watch groups are put out.
Lucius visits the Walker's residence in the evening, finding Ivy sitting on the porch. While talking, they finally admit their fondness for each other, and tell the elders the next day of their plans to be wed. The news travels fast through the small village, and Lucius is soon visited by Noah. Noah seems distraught at this news, and shocks Lucius when he stabs the young man repeatedly. Noah shortly thereafter leaves Lucius, and is found with blood on his hands. When a search is made to figure what has happened, Ivy goes to tell Lucius, only to find him on the floor of his small blacksmith's shop, not moving. Ivy is further worried when she cannot see his 'color.' For his actions, Noah is locked in a small house.
Lucius's wounds are too severe to be treated by the methods known in the village, and it is very possible he will soon die. Ivy goes to her father, requesting to go to "the towns" to retrieve medicines to save the man she loves. Edward is at first unsure about this, but soon after takes Ivy aside, and takes her to an old shed. Edward explains that the towns are a wicked place, and that Ivy's Grandfather was a wealthy man who was killed by a person in "the towns."
Edward opens the old shed, and Ivy is frightened when she senses the creatures inside. However, Edward explains that the creatures are not real - they are merely suits created by the elders to keep the other villagers from straying beyond the borders of the town. Edward then gives Ivy instructions on how to reach "The Towns," giving her his own permission to leave Covington to save Lucius, as per her request.
After Ivy has left, Edward goes to Alice, and explains that Ivy's quest to save Lucius is 'all he can give her,' in the wake of his secret feelings towards her. Edward then goes to the other elders and explains what he has done. While many are distraught, Edward claims that what he has done is meant to protect Covington's way of life. As the elders will not live forever, it is through the young people such as Ivy and Lucius that their way of life will be preserved.
Ivy packs supplies, including a gold pocket watch given to her by her father as payment for medicines. Ivy is accompanied into the woods by Kitty's husband Christop, and another young man named Finton Coin (Michael Pitt). Christop has taken no more than a couple steps outside the village's borders, when he grows frightened. Even though they are wearing yellow colored clothing (considered a 'good' color), and even though Ivy claims she has a bag of magic rocks to protect them, Christop turns back. Finton accompanies Ivy for another day, before he too is overcome with fear. Ivy allows him to go back, and continues on her own.
Ivy soon comes across a large pit that almost claims her life. After making her way around it, she hears a strange sound, and senses what she believes to be one of the creatures, even though her father told her they were not real. The creature charges her several times. Using her memory and remaining senses, Ivy manages to lead the creature back to the pit, where she tricks it into falling in. It turns out (unknown to Ivy) that the creature was actually Noah in one of the costumes. He had found the costume beneath the floorboards in the house where he was being kept, then put it on and escaped into the woods. Noah's fall badly injures him, and soon, he ceases to move.
Ivy continues on her way, and soon comes to a large wall. Carefully, she begins to climb over. As she does, several of the village elders open their locked black boxes. Contained within are mementos of their past life. It is soon apparent that Covington only has the appearance of being in the 19th century. The actual time is the present day.
The village of Covington came about as an idea by Edward Walker. After his father was murdered by a business partner, Walker joined a support group for others who had lost their loved ones to violence. Walker was a history professor at a local University, and had the idea to start a small isolated village, to insulate the members of the group from further harm or loss. Walker's father was very wealthy, and Edward had the village built deep in the interior of the Walker Wildlife Preserve. A large wall surrounds the preserve, and precautions are made to keep airplanes from flying overhead as well, to keep up the illusion of the village being a rural and rustic place.
Back at the wall, Ivy has made her way over, when she is startled by a strange sound, and the voice of a young man. The sound is actually the siren on the young man's vehicle. He is part of the patrol unit making sure people do not attempt to get into the preserve. Ivy is at first frightened by the young man, given what she has heard about people in "the towns." However, she soon senses kindness in the young man's voice, and he offers to help her get the medicines she needs.
Ivy is told to stay by the wall, while the young man leaves and returns with the supplies, along with a ladder. Ivy gives the young man the pocketwatch she has as payment, and makes her way back over the wall, and back into the woods, completely unaware of the modern-day world she has set foot into.
Ivy soon returns to the village.Word spreads of her encounter with a creature that she killed in the woods. Noah's parents are distraught over the news of their son's death, but Edward Walker sees a silver lining in this altercation. Edward had convinced Ivy that the creatures were fabrications by the elders. But having encountered what she thought was a real creature, she most likely now will be deterred from considering returning into the woods or telling Lucius about what Edward told her. She may even now think that her father told her these things to build her up to be brave for the journey.
Edward Walker also proclaims that they will go out later on and recover Noah's body, bury him, and claim the creatures killed him. In silence, the elders vow to keep going on with their charade, as Ivy returns to the Hunts' residence with the medicines, and sits down next to Lucius, as the elders watch her take his hand.