Regulators of G-protein signaling (RGS) proteins down-regulate signaling by heterotrimeric G-proteins by accelerating GTP hydrolysis on the G alpha subunits. Palmitoylation, the reversible addition of palmitate to cysteine residues, occurs on several RGS proteins and is critical for their activity. For RGS16, mutation of Cys-2 and Cys-12 blocks its incorporation of [3H]palmitate and ability to turn-off Gi and Gq signaling and significantly inhibited its GTPase activating protein activity toward aG alpha subunit fused to the 5-hydroxytryptamine receptor 1A, but did not reduce its plasma membrane localization based on cell fractionation studies and immunoelectron microscopy. Palmitoylation can target proteins, including many signaling proteins, to membrane microdomains, called lipid rafts. A subpopulation of endogenous RGS16 in rat liver membranes and overexpressed RGS16 in COS cells, but not the nonpalmitoylated cysteine mutant of RGS16, localized to lipid rafts. However, disruption of lipid rafts by treatment with methyl-beta-cyclodextrin did not decrease the GTPase activating protein activity of RGS16. The lipid raft fractions were enriched in protein acyltransferase activity, and RGS16 incorporated [3H]palmitate into a peptide fragment containing Cys-98, a highly conserved cysteine within the RGS box. These results suggest that the amino-terminal palmitoylation of an RGS protein promotes its lipid raft targeting that allows palmitoylation of a poorly accessible cysteine residue that we show in the accompanying article (Osterhout, J. L., Waheed, A. A., Hiol, A., Ward, R. J., Davey, P. C., Nini, L., Wang, J., Milligan, G., Jones, T. L. Z., and Druey, K. M. (2003) J. Biol. Chem. 278, 19309-19316) was critical for RGS16 and RGS4 GAP activity.