Genetic variations in TMEM106B, coding for a lysosomal membrane protein, affect frontotemporal lobar degeneration (FTLD) in GRN- (coding for progranulin) and C9orf72-expansion carriers and might play a role in aging. To determine the physiological function of TMEM106B, we generated TMEM106B-deficient mice. These mice develop proximal axonal swellings caused by drastically enlarged LAMP1-positive vacuoles, increased retrograde axonal transport of lysosomes, and accumulation of lipofuscin and autophagosomes. Giant vacuoles specifically accumulate at the distal end and within the axon initial segment, but not in peripheral nerves or at axon terminals, resulting in an impaired facial-nerve-dependent motor performance. These data implicate TMEM106B in mediating the axonal transport of LAMP1-positive organelles in motoneurons and axonal sorting at the initial segment. Our data provide mechanistic insight into how TMEM106B affects lysosomal proteolysis and degradative capacity in neurons.