The eye is an immunologically privileged and profoundly immunosuppressive environment. Early studies reported inhibition of T cell proliferation, IFN-γ production, and generation of regulatory T cells (Tregs) by aqueous humor (AH) and identified TGF-β as a critical factor. However, T cell subsets including Foxp3+ Treg and Th17 were unknown at that time, as was the role of retinoic acid (RA) in Treg induction. Consequently, the effect of the ocular microenvironment on T cell lineage commitment and function, and the role of RA in this process, had not been explored. We now use gene-manipulated mice and highly purified T cell populations to demonstrate that AH suppresses lineage commitment and acquisition of Th1 and Th17 effector function of naive T cells, manifested as reduction of lineage-specific transcription factors and cytokines. Instead, AH promoted its massive conversion to Foxp3+ Tregs that expressed CD25, GITR, CTLA-4, and CD103 and were functionally suppressive. TGF-β and RA were both needed and synergized for Treg conversion by AH, with TGF-β–enhancing T cell expression of RA receptor α. Newly converted Foxp3+ Tregs were unstable, but were stabilized upon continued exposure to AH or by the DNA demethylating agent 5-aza-2′-deoxycytidine. In contrast, T cells already committed to effector function were resistant to the suppressive and Treg-inducing effects of AH. We conclude that RA in the eye plays a dual role: in vision and in immune privilege. Nevertheless, primed effector T cells are relatively insensitive to AH, helping to explain their ability to induce uveitis despite an inhibitory ocular microenvironment.