The decision was announced following a meeting of the Policing Board and the Chief Constable, Hugh Orde, in Belfast on Thursday.
The Patten proposals on the future of policing recommended the reserve should be scrapped when the security situation allowed.
But Mr Orde had pressed the 19-member board to agree to the retention of the reserve for another three years.
After the meeting, the board said the contracts of about 1,200 police reservists would be extended until April 2005.
At that point a severance scheme will be offered and the reserve will be phased out completely by October 2006 unless there is a significant deterioration in the security situation or problems with the 50:50 Catholic recruitment programme.
Mr Orde said: "These officers were uncertain about their future. What we have delivered today is certainty."
Most points of the chief constable's plan for the future resourcing of the police service were unanimously backed by the board.
He plans to employ civilians in a number of areas to free up officers from desk jobs.
The most immediate of these will be in the operation of CCTV cameras.
"This is a very important package - civilianisation will be a key part of the plan," said Mr Orde.
'Moving forward'
Board Chairman Professor Desmond Rea said he considered the proposals as the "most complex and most important issue" the Policing Board has had to deal with.
"This is a police service moving forward and to do that it needs to have the right staff in the right place," he said.
"Success will depend on delivering all elements of the plan with the given timescales."
The Northern Ireland Secretary, John Reid, said he welcomed the outcome of Thursday's discussions.
"The board and the chief constable have addressed core issues in relation to ensuring that the police can provide the efficient and effective service which the public is entitled to expect," said Dr Reid.
Although Ulster Unionists have taken their seats on the board, and have been working alongside the newly formed Police Service of Northern Ireland, concern is still high within party ranks about developments since the changeover from the Royal Ulster Constabulary.
Ulster Unionists are also dismayed about the effect the changeover has had on police morale.
Meanwhile, Sinn Fein's policing spokesman Gerry Kelly has ruled out his party sitting on the Policing Board in the near future.
Sinn Fein has refused to nominate members to the board because it believes present structures and reforms fall short of the Patten report.
At a news conference in Belfast on Thursday, Mr Kelly dismissed the board as a "toothless tiger".
The review of policing in Northern Ireland by former Hong Kong Governor Chris Patten was one of the key elements of the 1998 Good Friday Agreement.