A Capital his entire NHL career, the 35-year-old Kolzig has played 585 games over 13 years and posted a .908 save percentage and a 2.62 goals-against average with 249 victories.
"I'm very excited," said Kolzig, who will earn $5.45 million in each year of the extension. "This is the only team I've known, and I'm very optimistic about where the organization is going and if we could ever win a Stanley Cup here during my time."
The 19th overall selection in the 1989 draft, Kolzig helped lead the Capitals to the 1998 Stanley Cup final, where they lost to Detroit.
"We fell a little short against Detroit," he said. "We thought we'd be back sooner rather than later and we haven't been back yet. I'm getting the itch to not only get back to the finals, but obviously raise the Cup over my head. I think it would be the ultimate goal here for this organization."
Kolzig, who signed a five-year, $31 million extension in Aug. 2001, is a member of Germany's Olympic team at the Turin Games.
Also, the Capitals sent forward Dave Steckel to Hershey of the AHL.