The invention provides a rare earth magnesium alloy and a preparation method thereof. The rare earth magnesium alloy comprises the following components in percentage by weight: 3.5-4.5% of Gd, 2.2-2.8% of Y, 1.5-2.0% of Nd, 0.1-1.5% of Dy, 0.45-0.55% of Zr and the balance of Mg. The rare earth magnesium alloy provided by the invention is prepared through the following steps: melting magnesium, a magnesium-gadolinium intermediate alloy, a magnesium-yttrium intermediate alloy, a magnesium-neodymium intermediate alloy, a magnesium-dysprosium intermediate alloy and a magnesium-zirconium intermediate alloy to prepare a rare earth magnesium alloy cast; and performing heat treatment on the rare earth magnesium alloy cast obtained in the above step to obtain the rare earth magnesium alloy. The content of rare earth in percentage by weight in the rare earth magnesium alloy provided by the invention is not higher than 10%, and the good mechanical properties can be simultaneously realized at high temperature.