Nelsen, who won 49 international caps for New Zealand, was named Toronto coach last month but there was uncertainty over the timing of his QPR exit.
The New Zealander, who has also quit international football, will bow out of the English Premier League with QPR's match against Manchester City on January 29.
"We had a talk and we needed to give QPR as much time as possible to bring in a replacement or sort their things out," Nelsen said on Toronto's website.
"If they knew I was leaving earlier, it would have been harder in the transfer window," added the player, whose one-year contract with QPR was to expire in June.
Nelsen said he had also conveyed his decision to quit international football to New Zealand Football.
"I spoke with NZF Chairman Frank van Hattum and All Whites coach Ricki Herbert earlier today to personally confirm my decision to retire from international football," he added.
Nelsen retires with the All Whites poised to qualify for November's intercontinental playoff against the fourth-best team from North and Central America, with the winner advancing to the 2014 World Cup finals in Brazil.
"Like many of sports greats, he has gone out on his own terms," said New Zealand Football chairman van Hattum.
"His contribution to New Zealand Football has been significant as an inspirational leader in every respect. Without doubt he is one of our all-time greats."
All Whites coach Ricki Herbert said Nelsen would be difficult to replace.
"This day was always going to come eventually," he added.
"While we will really miss him, he goes with our best wishes and I'm sure he will be as successful in his career as a coach as he was a player."