The process by which the periderm transitions to stratified epidermis with the establishment of the skin barrier is unknown. Understanding the cellular and molecular processes involved is crucial for the treatment of human pathologies, where abnormal skin development and barrier dysfunction are associated with hypothermia and perinatal dehydration. For the first time, we demonstrate that retinoic acid (RA) levels are important for periderm desquamation, embryonic skin differentiation and barrier formation. Although excess exogenous RA has been known to have teratogenic effects, little is known about the consequences of elevated endogenous retinoids in skin during embryogenesis. Absence of cytochrome P450, family 26, subfamily b, polypeptide 1 (Cyp26b1), a retinoic-acid-degrading enzyme, results in aberrant epidermal differentiation and filaggrin expression, defective cornified envelopes and skin barrier formation, in conjunction with peridermal retention. We show that these alterations are RA dependent because administration of exogenous RA in vivo and to organotypic skin cultures phenocopy Cyp26b1^−/− skin abnormalities. Furthermore, utilizing the Flaky tail (Ft/Ft) mice, a mouse model for human ichthyosis, characterized by mutations in the filaggrin gene, we establish that proper differentiation and barrier formation is a prerequisite for periderm sloughing. These results are important in understanding pathologies associated with abnormal embryonic skin development and barrier dysfunction.