Terms of the deal announced Thursday weren't released, but it is reportedly a one-year contract for the team's salary cap exception of $2.7 million with a player option for another year at roughly the same amount.
Nelson spent his first 10 seasons with Orlando after the Magic acquired his rights from Denver, which took him with the 20th overall pick in 2004. The 32-year-old has career averages of 12.6 points and 5.4 assists.
Orlando waived its career leader in assists on June 30.
Nelson was an All-Star in 2009, when he averaged 16.7 points and shot 45 percent from 3-point range.
He joins a crowded list at point guard alongside Devin Harris and Raymond Felton.