O'Donnell, 25, joined the League One outfit as a free agent in the summer following his release by Chestetfield, signing a one-year deal.
He has since gone on to firmly establish himself as the Saddlers' first-choice stopper, starting all 29 of the club's matches this term.
And he has now been rewarded with fresh terms until the end of next season.
O'Donnell said: "This is something I have worked towards since the day I first arrived here. I am really pleased this has been sorted and now I can concentrate on my football and our push for the play-offs.
"My development has been good under the guidance of Neil Cutler (goalkeeping coach) and I really enjoy working with the gaffer and Richard O'Kelly.
"I feel that I am getting better and better; there is a lot of hard work ahead, but I am ready for it."
Manager Dean Smith added: "Richard fully deserves this extension. He has steadily improved and developed since he has been here and has played in every game for us.
"He is a hard-working and dedicated lad who has really benefited from the work he has done with Neil.
"This is another important piece of the jigsaw for us as we plan ahead. He's a good age and fits our criteria in that he has a real willingness to learn and further develop.
"There are areas of his game that he needs to work on, but he is a talented goalkeeper and I am delighted that he has committed his future to us."