How biological diversity is generated and maintained is a fundamental question in ecology. Ecologists have delineated many mechanisms that can, in principle, favor species coexistence and hence maintain biodiversity. Most such coexistence mechanisms require or imply tradeoffs between different aspects of species performance. However, it remains unknown whether simple functional tradeoffs underlie coexistence mechanisms in diverse natural systems. We show that functional tradeoffs explain species differences in long-term population dynamics that are associated with recovery from low density (and hence coexistence) for a community of winter annual plants in the Sonoran Desert. We develop a new general framework for quantifying the magnitude of coexistence via the storage effect and use this framework to assess the strength of the storage effect in the winter annual community. We then combine a 25-year record of vital rates with morphological and physiological measurements to identify functional differences between species in the growth and reproductive phase of the life cycle that promote storage-effect coexistence. Separation of species along a tradeoff between growth capacity and low-resource tolerance corresponds to differences in demographic responses to environmental variation across years. Growing season precipitation is one critical environmental variable underlying the demographic decoupling of species. These results demonstrate how partially decoupled population dynamics that promote local biodiversity are associated with physiological differences in resource uptake and allocation between species. These results for a relatively simple system demonstrate how long-term community dynamics relate to functional biology, a linkage scientists have long sought for more complex systems.