The NaYF₄:Yb³⁺,Tb³⁺ (x_Yb: 0.20, x_Tb: 0.04) materials were prepared using the co-precipitation method. The as-prepared material was washed either with or without water in addition to ethanol and thereafter annealed for 5 h at 500 °C. This resulted in materials with moderate or very high up-conversion luminescence intensity, respectively. The structural study carried out with X-ray powder diffraction revealed microstrains in the rare earth (R) sublattice that were relaxed for the material with very high up-conversion intensity thus decreasing energy losses. The local structural details were investigated with R L_III and Y K edge extended X-ray absorption fine structure (EXAFS) using synchrotron radiation. Around 10 mol.% of the Yb³⁺ ions were found to occupy the Na site in the material with very high up-conversion intensity. These Yb species formed clusters with the Tb³⁺ ions occupying the regular Na/R sites. Such clustering enhanced the energy transfer between Yb³⁺ and Tb³⁺ thus intensifying the up-conversion emission.