Proteins involved in cholesterol trafficking are known to contribute to the pathogenesis of atherosclerosis and Alzheimer's disease. Allelic variants in the cholesterol transporters apolipoprotein E and ATP-binding cassette protein A1 (ABCA1) have recently been associated with susceptibility to age-related macular degeneration (AMD). Histopathological analyses of eyes with AMD demonstrate the presence of cholesterol and cholesteryl ester deposits beneath the retinal pigment epithelium (RPE), implicating abnormal cholesterol trafficking in disease progression. Here, we show that A2E, a quaternary amine and retinoid by-product of the visual cycle, causes the accumulation of free and esterified cholesterol in RPE cells. The mechanism involves neither generalized alterations in late endosomal/lysosomal pH nor a direct inhibition of acid lipase activity. Rather, A2E prevents cholesterol efflux from these organelles, which in turn indirectly inhibits acid lipase, leading to a subsequent accumulation of cholesteryl esters. Transcriptional activation of the ABCA1 cholesterol transporter by agonists of the liver X receptor/peroxisome proliferator-activated receptor pathway relieves the A2E-induced block on cholesterol efflux and restores cholesterol homeostasis in RPE cells. Our data also demonstrate that A2E, which is a cone-shaped lipid, increases the chemical activity and displacement of cholesterol from model membranes, providing a biophysical mechanism for cholesterol sequestration in A2E-loaded cells. Although endogenously produced A2E in the RPE has been associated with macular degeneration, the precise mechanisms are unclear. Our results provide direct evidence that A2E causes aberrant cholesterol metabolism in RPE cells which could likely contribute to AMD progression.