The 32-year-old had been widely expected to leave New Zealand rugby after the 2015 tournament in England following a horrendous run with injuries.
It will be Carter's second foray into French club rugby after he signed a seven-month deal with Perpignan in 2008 but only played five games before a foot injury.
Carter will earn a reported two million dollars a year at Racing, making him the highest-paid player in the world.
"Carter will be the best paid player at Racing but also the least expensive because of the economic benefits," Jacky Lorenzetti, the millionaire owner of the club, told a news conference on Thursday.
"We count on his experience to help the other players grow," coach Laurent Labit added.
Racing's other coach, Laurent Travers, said Carter would play either as flyhalf or inside centre. "He can play 10 or 12. He does not have a priority. He just wants to bring something to the team."
"It's going to be an awesome adventure for me and my family," Carter said in a statement.
"Having said that, it's the immediate future that is exciting me at the moment. 2015 is going to be a big year and I'm looking forward to getting into it."
He joins Australia veteran Adam Ashley-Cooper, who said earlier he would join Bordeaux-Begles on a two-year contract, and former Wallabies captain James Horwill who will join English club Harlequins following the World Cup.
RED-FLAG ATHLETE
The exodus from New Zealand and Australia is expected to grow, with reports that All Blacks inside centre Ma'a Nonu is fielding overseas offers.
Both nations have selection policies that preclude players based offshore from playing for the national sides.
Carter's move is unsurprising given his run with injury since the 2011 World Cup, where he suffered a torn groin muscle before the All Blacks' final pool game and was ruled out of the rest of the tournament.
He has appeared in just eight of the All Blacks' 28 tests in the past two seasons after problems with his Achilles' tendon, groin, shoulder and a broken leg.
He was identified by coach Steve Hansen two years ago as a 'red-flag athlete', whose workload needed to be carefully managed to get him through to the 2015 World Cup.
Carter had a NZRU-approved six-month sabbatical earlier this year to allow him time to recover from niggling injuries but then broke his leg in the Super Rugby final in August and played just two tests on the end of season tour this year.
(Reporting by Greg Stutchbury and Julien Pretot; Editing by John O'Brien)
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