It will be Grodin's first feature film in seven years. He was last seen alongside Zach Braff and Jason Bateman in the 2006 comedy "The Ex."
Watts and Ben Stiller star as a married couple that strikes up an unlikely friendship with a free-spirited younger couple, to be played by Adam Driver ("Girls") and Amanda Seyfried ("Lovelace").
Adam Horovitz, aka Ad-Rock of the Beastie Boys, is expected to co-star as a married friend of Stiller and Watts.
Baumbach will direct the long-gestating project from his own original screenplay. Scott Rudin and Eli Bush are producing the movie, which will start production this fall in New York.
Grodin is back in the acting game after taking some time off to enjoy life with his family. He kept himself busy writing a book, "Just When I Thought I'd Heard Everything! Humorous Observations on Life in America," and he recently guest starred on an episode of "Law & Order: Special Victims Unit," which marked his first TV appearance outside of the talk-show circuit in more than a decade.
Grodin is represented by Paradigm.