Precise regulation of Wnt signaling is important in many contexts, as in development of the vertebrate forebrain, where excessive or ectopic Wnt signaling leads to severe brain defects. Mutation of the widely expressed oto gene causes loss of the anterior forebrain during mouse embryogenesis. Here we report that oto is the mouse ortholog of the gpi deacylase gene pgap1, and that the endoplasmic reticulum (ER)-resident Oto protein has a novel and deacylase-independent function during Wnt maturation. Oto increases the hydrophobicities of Wnt3a and Wnt1 by promoting the addition of glycophosphatidylinositol (gpi)-like anchors to these Wnts, which results in their retention in the ER. We also report that oto-deficient embryos exhibit prematurely robust Wnt activity in the Wnt1 domain of the early neural plate. We examine the effect of low oto expression on Wnt1 in vitro by knocking down endogenous oto expression in 293 and M14 melanoma cells using shRNA. Knockdown of oto results in increased Wnt1 secretion which is correlated with greatly enhanced canonical Wnt activity. These data indicate that oto deficiency increases Wnt signaling in vivo and in vitro. Finally, we address the mechanism of Oto-mediated Wnt retention under oto-abundant conditions, by cotransfecting Wnt1 with gpi-specific phospholipase D (GPI-PLD). The presence of GPI-PLD in the secretory pathway results in increased secretion of soluble Wnt1, suggesting that the gpi-like anchor lipids on Wnt1 mediate its retention in the ER. These data now provide a mechanistic framework for understanding the forebrain defects in oto mice, and support a role for Oto-mediated Wnt regulation during early brain development. Our work highlights a critical role for ER retention in regulating Wnt signaling in the mouse embryo, and gives insight into the notoriously inefficient secretion of Wnts.