The heart is derived from two sources of progenitor cells: the first heart field giving rise to the left ventricle and atria, and the Second Heart Field (SHF) that progressively contributes to the right ventricle, outflow tract and parts of the atria. Perturbation of SHF cell addition leads to a spectrum of congenital heart defects, exemplified by conotruncal and atrioventricular septal defects observed in mouse embryos lacking the T-box transcription factor Tbx1, encoded by the major 22q11.2 deletion (DiGeorge) syndrome candidate gene. Tbx1 is expressed in the SHF where it regulates proliferation, differentiation and epithelial properties. Tbx1 is also required for the segregation of distinct anterior and posterior subpopulations of the SHF giving rise to arterial and venous pole myocardium, respectively. Here we show using genetic lineage tracing and immunofluorescence labeling that a second T-box gene Tbx5, implicated in Holt-Oram syndrome, is activated in Tbx1-positive pharyngeal mesoderm in response to retinoic acid signaling at the onset of progenitor cell segregation. Loss of retinoic acid signaling results in failure to establish the posterior SHF domain and atrioventricular septal defects. SHF cells coexpressing Tbx1 and Tbx5 subsequently downregulate Tbx1 expression, in a Tbx1-dependent manner, leading to the emergence of a transcriptional boundary between anterior and posterior SHF domains. Analysis of Tbx5 lineage and conditional loss of function implicate de novo activation of Tbx5 in boundary formation. Our results provide new insights into progenitor cell patterning during SHF deployment and the origins of common forms of congenital heart defects.