diff --git a/crates/ruff/src/rules/pyupgrade/rules/use_pep604_annotation.rs b/crates/ruff/src/rules/pyupgrade/rules/use_pep604_annotation.rs
index b1515b410e6d8..2f2fea042458f 100644
--- a/crates/ruff/src/rules/pyupgrade/rules/use_pep604_annotation.rs
+++ b/crates/ruff/src/rules/pyupgrade/rules/use_pep604_annotation.rs
@@ -60,6 +60,7 @@ pub(crate) fn use_pep604_annotation(
     // Avoid fixing forward references, or types not in an annotation.
     let fixable = checker.semantic().in_type_definition()
         && !checker.semantic().in_complex_string_type_definition();
+
     match operator {
         Pep604Operator::Optional => {
             let mut diagnostic = Diagnostic::new(NonPEP604Annotation, expr.range());
diff --git a/crates/ruff/src/rules/pyupgrade/snapshots/ruff__rules__pyupgrade__tests__UP007.py.snap b/crates/ruff/src/rules/pyupgrade/snapshots/ruff__rules__pyupgrade__tests__UP007.py.snap
index dc112cd0e0161..250930ff96ad6 100644
--- a/crates/ruff/src/rules/pyupgrade/snapshots/ruff__rules__pyupgrade__tests__UP007.py.snap
+++ b/crates/ruff/src/rules/pyupgrade/snapshots/ruff__rules__pyupgrade__tests__UP007.py.snap
@@ -276,4 +276,20 @@ UP007.py:60:8: UP007 [*] Use `X | Y` for type annotations
    60 |+    x: str | int
 61 61 |     x: Union["str", "int"]
 
+UP007.py:61:8: UP007 [*] Use `X | Y` for type annotations
+   |
+59 |     x = Union["str", "int"]
+60 |     x: Union[str, int]
+61 |     x: Union["str", "int"]
+   |        ^^^^^^^^^^^^^^^^^^^ UP007
+   |
+   = help: Convert to `X | Y`
+
+ℹ Suggested fix
+58 58 |     x = Union[str, int]
+59 59 |     x = Union["str", "int"]
+60 60 |     x: Union[str, int]
+61    |-    x: Union["str", "int"]
+   61 |+    x: "str" | "int"
+
 
diff --git a/crates/ruff_python_semantic/src/analyze/typing.rs b/crates/ruff_python_semantic/src/analyze/typing.rs
index 4da230cd7011e..39ea75af8684e 100644
--- a/crates/ruff_python_semantic/src/analyze/typing.rs
+++ b/crates/ruff_python_semantic/src/analyze/typing.rs
@@ -127,22 +127,36 @@ pub fn to_pep604_operator(
     slice: &Expr,
     semantic: &SemanticModel,
 ) -> Option<Pep604Operator> {
-    /// Returns `true` if any argument in the slice is a string.
-    fn any_arg_is_str(slice: &Expr) -> bool {
+    /// Returns `true` if any argument in the slice is a quoted annotation).
+    fn quoted_annotation(slice: &Expr) -> bool {
         match slice {
             Expr::Constant(ast::ExprConstant {
                 value: Constant::Str(_),
                 ..
             }) => true,
-            Expr::Tuple(ast::ExprTuple { elts, .. }) => elts.iter().any(any_arg_is_str),
+            Expr::Tuple(ast::ExprTuple { elts, .. }) => elts.iter().any(quoted_annotation),
             _ => false,
         }
     }
 
-    // If any of the _arguments_ are forward references, we can't use PEP 604.
-    // Ex) `Union["str", "int"]` can't be converted to `"str" | "int"`.
-    if any_arg_is_str(slice) {
-        return None;
+    // If the slice is a forward reference (e.g., `Optional["Foo"]`), it can only be rewritten
+    // if we're in a typing-only context.
+    //
+    // This, for example, is invalid, as Python will evaluate `"Foo" | None` at runtime in order to
+    // populate the function's `__annotations__`:
+    // ```python
+    // def f(x: "Foo" | None): ...
+    // ```
+    //
+    // This, however, is valid:
+    // ```python
+    // def f():
+    //     x: "Foo" | None
+    // ```
+    if quoted_annotation(slice) {
+        if semantic.execution_context().is_runtime() {
+            return None;
+        }
     }
 
     semantic