Goretzka has been a long-time servant of the club, having joined Bayern in 2018, making nearly 300 appearances en route to six Bundesliga titles, two German cups and the Champions League trophy in 2020.
Atletico Madrid were reportedly interested in signing the 30-year-old, but Goretzka said he was staying put after a "turbulent" few days of negotiations that also brought him some "clarity".
"As much as I'm honoured by the interest shown by top international clubs, I have made a clear decision for myself that I want to stay at FC Bayern until the end of the season," Goretzka wrote on Instagram.
"At the same time, the club and I have decided in good and constructive discussions that our successful time together will come to an end in the summer."
Arriving from Schalke in 2018, the technically gifted midfielder was transformed into an all-action player, adding muscle and authority to his game.
He thrived under Hansi Flick as Bayern won the treble in the 2019-20 season, when he was paired with Joshua Kimmich in the midfield engine room.
Injuries and managerial changes pushed Goretzka in and out of favour, but he remained a key figure in the dressing room while being pivotal in big matches.
"As I said earlier, it is also the right time for me to start a new chapter: as a footballer and as a person. But there is still a lot to do before that," Goretzka added.
"Let's give it our all together to ensure that we achieve maximum success this season and at the World Cup, with FC Bayern and also with the national team! I'm looking forward to it!"
Bayern are top of the Bundesliga after 19 games with an eight-point lead , while they have also qualified for the knockout stages of the Champions League.