I'm really surprised to hear about this news. Because as far as I knew Brazil already made a contract with him for the summer of 2024 according to some news sources. But it seems like all that was a lie.
Barcelona are still not back to their former glory. Atletico Madrid are also not good enough to push for the top. If Real Madrid makes a few more good signings, Ancelotti could have dream years at Real Madrid. I think it would be better for him to play a few more seasons in Spain with a Real Madrid that is stronger than the other teams in the league than to have a new adventure with the Brazilian national team.
This is good for Real Madrid definitely by the way. Ancelotti is a wonderful manager for Real Madrid now. If they were about to lose him next summer I don't know who they would have brought to the job. Maybe Xabi Alonso would have been an alternative then. After this contract extension I'm confident about Real Madrid to maintain their success until the end of his contract.
They don't have many alternatives except Xabi Alonso. Zidane's name is always on the agenda in the press. But Xabi Alonso is more popular than any other candidate with his recent performances.