"It never got to the point where we actually talked about a new contract. It just felt right that it was time for us both to look at different options... in his six years here he has made us a very competitive club in what is a competitive league."
Assistant manager Terry Connor will also depart at the end of the season.
Former Ireland manager McCarthy, who joined Ipswich in November 2012, guided the club to the playoffs in the 2014-15 campaign where they lost to Norwich in the semi-finals. They have struggled for consistency this season and are currently 12th in the table.
Ipswich travel to Birmingham City on Saturday.
(Reporting by Shrivathsa Sridhar in Bengaluru; Editing by Keith Weir)
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