Complex biological processes are regulated by both genetic and epigenetic programs. One class of epigenetic modifications is methylation. Evolutionarily conserved methyl-CpG-binding domain (MBD)-containing proteins are known as readers of DNA methylation. MBD5 is linked to multiple human diseases but its mechanism of action remains unclear. Here we report that the zebrafish Mbd5 does not bind to methylated DNA; but rather, it directly binds to 5-methylcytosine (m5C)-modified mRNAs and regulates embryonic development, erythrocyte differentiation, iron metabolism, and behavior. We further show that Mbd5 facilitates removal of the monoubiquitin mark at histone H2A-K119 through an interaction with the Polycomb repressive deubiquitinase (PR-DUB) complex in vivo. The direct target genes of Mbd5 are enriched with both RNA m5C and H2A-K119 ubiquitylation signals. Together, we propose that zebrafish MBD5 is an RNA m5C reader that potentially links RNA methylation to histone modification and in turn transcription regulation in vivo.