Post-translational modification by protein prenylation is required for membrane targeting and biological function of monomeric GTPases. Ras and Rho proteins possess a C-terminal CAAX motif (C is cysteine, A is usually an aliphatic residue, and X is any amino acid), in which the cysteine is prenylated, followed by proteolytic cleavage of the AAX peptide and carboxyl methylation by the Rce1 CAAX protease and Icmt methyltransferase, respectively. Rab GTPases usually undergo double geranylgeranylation within CC or CXC motifs. However, very little is known about processing and membrane targeting of Rabs that naturally contain a CAAX motif. We show here that a variety of Rab-CAAX proteins undergo carboxyl methylation, both in vitro and in vivo, with one exception. Rab38(CAKS) is not methylated in vivo, presumably because of the inhibitory action of the lysine residue within the AAX motif for cleavage by Rce1. Unlike farnesylated Ras proteins, we observed no targeting defects of overexpressed Rab-CAAX proteins in cells deficient in Rce1 or Icmt, as reported for geranylgeranylated Rho proteins. However, endogenous geranylgeranylated non-methylated Rab-CAAX and Rab-CXC proteins were significantly redistributed to the cytosol at steady-state levels and redistribution correlates with higher affinity of RabGDI for non-methylated Rabs in Icmt-deficient cells. Our data suggest a role for methylation in Rab function by regulating the cycle of Rab membrane recruitment and retrieval. Our findings also imply that those Rabs that undergo post-prenylation processing follow an indirect targeting pathway requiring initial endoplasmic reticulum membrane association prior to specific organelle targeting.