Retinol dehydrogenase 12 (RDH12) is an NADP(+)-dependent oxidoreductase that in vitro catalyzes the reduction of all-trans-retinaldehyde to all-trans-retinol or the oxidation of retinol to retinaldehyde depending on substrate and cofactor availability. Recent studies have linked the mutations in RDH12 to severe early-onset autosomal recessive retinal dystrophy. The biochemical basis of photoreceptor cell death caused by mutations in RDH12 is not clear because the physiological role of RDH12 is not yet fully understood. Here we demonstrate that, although bi-directional in vitro, in living cells, RDH12 acts exclusively as a retinaldehyde reductase, shifting the retinoid homeostasis toward the increased levels of retinol and decreased levels of bioactive retinoic acid. The retinaldehyde reductase activity of RDH12 protects the cells from retinaldehyde-induced cell death, especially at high retinaldehyde concentrations, and this protective effect correlates with the lower levels of retinoic acid in RDH12-expressing cells. Disease-associated mutants of RDH12, T49M and I51N, exhibit significant residual activity in vitro, but are unable to control retinoic acid levels in the cells because of their dramatically reduced affinity for NADPH and much lower protein expression levels. These results suggest that RDH12 acts as a regulator of retinoic acid biosynthesis and protects photoreceptors against overproduction of retinoic acid from all-trans-retinaldehyde, which diffuses into the inner segments of photoreceptors from illuminated rhodopsin. These results provide a novel insight into the mechanism of retinal degeneration associated with mutations in RDH12 and are consistent with the observation that RDH12-null mice are highly susceptible to light-induced retinal apoptosis in cone and rod photoreceptors.