The insertion and removal of NMDA receptors from the synapse are critical events that modulate synaptic plasticity. While a great deal of progress has been made on understanding the mechanisms that modulate trafficking of NMDA receptors, we do not currently understand the molecular events required for the fusion of receptor containing vesicles with the plasma membrane. Here, we show that sphingomyelin phosphodiesterase 3 (also known as neutral sphingomyelinase-2) is critical for tumor necrosis factor (TNF) α-induced trafficking of NMDA receptors and synaptic plasticity. TNFα initiated a rapid increase in ceramide that was associated with increased surface localization of NMDA receptor NR1 subunits and a specific clustering of NR1 phosphorylated on serines 896 and 897 into lipid rafts. Brief applications of TNFα increased the rate and amplitude of NMDA-evoked calcium bursts and enhanced excitatory post-synaptic currents. Pharmacological inhibition or genetic mutation of neutral sphingomyelinase-2 prevented TNFα-induced generation of ceramide, phosphorylation of NR1 subunits, clustering of NR1, enhancement of NMDA-evoked calcium flux and excitatory post-synaptic currents.