The New Zealander, who took over in 2013 after a successful spell at Irish province Leinster, led the country to back-to-back Six Nations titles in his first two years and reached the quarter-finals at last year's World Cup.
Ireland finished a disappointing third in this year's Six Nations but won a test match for the first time in South Africa in a much improved tour in June.
"I'd like to thank the IRFU for their patience and confidence as the decision to continue took somewhat longer than I'd anticipated," Schmidt said in a statement.
"It is difficult at times being so far away from extended family but we appreciate how lucky we are to have the support we have here in Ireland."
Schmidt is among several native Kiwis, including current and former Six Nations rivals Vern Cotter and Warren Gatland, seen as potential successors to New Zealand coach Steve Hansen when his contract expires after the 2019 World Cup in Japan.
"Joe is one of the leading coaches in world rugby and it is fantastic for Irish rugby that he has committed until the end of the World Cup cycle," said IRFU Performance Director David Nucifora.
(Reporting by Padraic Halpin, editing by Pritha Sarkar)
