Inositol polyphosphate 4-phosphatase B (INPP4B) has been identified as a tumor suppressor mutated in human breast, ovary, and prostate cancers. The molecular mechanism underlying INPP4B's tumor-suppressive role is currently unknown. Here, we demonstrate that INPP4B restrains tumor development by dephosphorylating the PtdIns(3,4,5)P3 that accumulates in situations of PTEN deficiency. In vitro, INPP4B directly dephosphorylates PtdIns(3,4,5)P3. In vivo, neither inactivation of Inpp4b (Inpp4b(Δ/Δ)) nor heterozygous deletion of Pten (Pten(+/-)) in mice causes thyroid abnormalities, but a combination of these mutations induces malignant thyroid cancers with lung metastases. At the molecular level, simultaneous deletion of Inpp4b and Pten synergistically increases PtdIns(3,4,5)P3 levels and activates AKT downstream signaling proteins in thyroid cells. We propose that the PtdIns(3,4,5)P3 phosphatase activity of INPP4B can function as a "back-up" mechanism when PTEN is deficient, making INPP4B a potential novel therapeutic target for PTEN-deficient or PIK3CA-activated cancers. Although INPP4B expression is reduced in several types of human cancers, our work on Inpp4B-deficient mice provides the first evidence that INPP4B is a bona fide tumor suppressor whose function is particularly important in situations of PTEN deficiency. Our biochemical data demonstrate that INPP4B directly dephosphorylates PtdIns(3,4,5)P3.