The 44-year-old made the announcement at SHR's workshop in North Carolina on Wednesday, local time.
Stewart stressed that he will remain heavily involved in the sport as a team owner, having taking a co-ownership position in Gene Haas' squad in 2009.
“It was a choice that was 100 percent mine,” said Stewart, who has won 48 Sprint Cup races and three titles, of his decision to retire.
“There wasn't any pressure from anybody. If anything it was the opposite, I had more people trying to talk me out of it than anything.
“I think it's a scenario where everybody in their career at some point makes the decision that it's time for a change.
“It's nothing that you plan, I think it just happens. Deep down you know when it's time to do something different.
“It's kind of a bittersweet day. I'm kind of excited about it but I'm sad about it as well.
“The great thing is that I'm not going anywhere. NASCAR is probably going to be the most disappointed of everybody today because they aren't getting rid of me.
“They have to deal with me as an owner, so there's still opportunity to get fined and put on probation, just like always. It's just from a different capacity.”
Stewart admitted he contemplated hanging up his helmet at the end of the current season, but says a farewell tour is important for fans.
“It's as important for me to do this for them as it as it for my career,” he said
The Indiana native has been racing full-time in NASCAR's top division since making the switch from the Indy Racing League in 1999.
He won the IRL title in 1997, before taking out the Sprint Cup championship in 2002, 2005 and 2011.
Stewart remains winless since mid-2013 and has been embroiled in controversy since, largely surrounding his involvement in a speedway incident that killed fellow driver Kevin Ward Jr.
Despite the circumstances, Stewart stressed that Ward's death has “zero percent” to do with his decision to retire, hinting that he'll continue to make occasional racing appearances outside of the Sprint Cup.
“The tragedy, nothing is going to change that. It happened, but it's not going to direct the rest of my life,” he said.
“I'm still going to race when I want to go race.”
Bowyer, whose current team Michael Waltrip Racing will close at the end of this year, is expected to line-up in a HScott Motorsport Chevrolet next season before stepping into Stewart's team.
“These are big shoes to fill, but boy am I ever looking forward to getting behind the wheel of a champion's ride, and have Tony there with me along the way,” said Bowyer.
Stewart-Haas Racing fields four cars in the Cup Series, running Stewart alongside Kevin Harvick, Danica Patrick and Kurt Busch.