Widespread lake shrinkage in cold regions has been linked to climate warming and permafrost thaw. Permafrost aggradation, however, has been observed within the margins of recently receded lakes, in seeming contradiction of climate warming. Here permafrost aggradation dynamics are examined at Twelvemile Lake, a retreating lake in interior Alaska. Observations reveal patches of recently formed permafrost within the dried lake margin, colocated with discrete bands of willow shrub. We test ecological succession, which alters shading, infiltration, and heat transport, as the driver of aggradation using numerical simulation of variably saturated groundwater flow and heat transport with phase change (i.e., freeze-thaw). Simulations support permafrost development under current climatic conditions, but only when net effects of vegetation on soil conditions are incorporated, thus pointing to the role of ecological succession. Furthermore, model results indicate that permafrost aggradation is transitory with further climate warming, as new permafrost thaws within seven decades.