Margolin was born in New York City, the daughter of Jewish parents Benjamin Margolin, an accountant who was born in Russia and was the founder and president of the Nephrosis Foundation, now the Kidney Foundation of New York. Her mother was Annette Margolin (née Lief, the daughter of Abraham and Nina Lief).
She attended the High School of Performing Arts. In 1961, at age 18, while a prop girl at the New York Shakespeare Festival, she won a "pivotal" Broadway stage role as Anna in Morris West's Daughter of Silence. The New York Times, reviewing the play, listed her among leaders of "a fine cast" and said that "her Anna has a fragile, haunted dewiness."
In 1962, she played her first movie role; she was the female lead in the film David and Lisa. She co-starred with Marlon Brando in 1965's Morituri and opposite Steve McQueen in the western Nevada Smith.
Margolin later played Wanda, the love interest of the lead character David Kolowitz, in the movie Enter Laughing (1967).
In Take the Money and Run (1969) she played the love interest of the bumbling thief played by Woody Allen, and in Annie Hall (1977) she played the social-climbing wife of the Woody Allen character.
In 1979, she co-starred with Roy Scheider in director Jonathan Demme's film, the thriller Last Embrace.
Her last movie role was in Ghostbusters II in 1989, and her last television roles were as a killer in an episode of Murder, She Wrote ("Deadly Misunderstanding") and as a victim in Columbo: Murder in Malibu in 1990.
Margolin died of ovarian cancer at the age of 50 on December 17, 1993, in Los Angeles, California. She was cremated and her ashes were placed in an urn garden at Westwood Memorial Park in Los Angeles. She was survived by her siblings, Emily, Barbara, and Laura; her husband, actor/director Ted Wass; and their two children, Julian and Matilda.
Margolin has been frequently erroneously identified as the sister of actor Stuart Margolin and his brother, director Arnold Margolin. However, obituaries of Margolin and her father indicate that she had no brothers, although she and Stuart Margolin acted together as man and wife in the pilot film for the 1970s TV series, Lanigan's Rabbi. She was close friends with producer/actress Jennifer Salt, who had co-starred with Wass in the '70s sitcom Soap.