Real Madrid announced through their official website that Alonso will coach the academy team for the entire season in order to obtain his UEFA Pro Licence.
The ex-Liverpool and Bayern Munich star secured his requisite coaching badges earlier this year and follows in the footsteps of former Madrid players, including Guti, Santiago Solari, and Zidane, who returned to the club after their playing career.
Alonso joined Madrid from Liverpool in the summer of 2009.
The 36-year-old spent five years with the La Liga giants, making 236 appearances.
He won every trophy with Madrid before joining Bayern Munich in 2014.
“After 17 years in the game, I have considered the next step in my career,” Alonso wrote on his Instagram page last year.
“I have decided to go into management. Find out [where] soon”.