Optical birefringence in liquid‐phase‐epitaxial‐grown (LPE) Bi‐substituted iron garnet films was investigated with annealing. The optical birefringence was found to be composed of a stress‐induced part and a growth‐induced part. The growth‐induced optical birefringence &Dgr;ngwas about 5×10−4at &lgr;=1.15 &mgr;m. &Dgr;ngand the growth‐induced magnetic anisotropyKgdisappeared after the annealing. Time constants for changes of &Dgr;ngandKgby the annealing were nearly the same and orders of a few hours at 1100–1150 °C. A deformation of the microscopic structure around bismuth ions seems to be responsible for both &Dgr;ngandKg. The large growth‐induced optical birefringence in Bi‐substituted iron garnet films plays an important role to achieve high efficiency TE‐TM mode conversion in magneto‐optical waveguides.