The announcement was made at the UC Board of Regents meeting.
"My time at UC has been deeply gratifying and rewarding. I have been honored and inspired every day to serve this institution alongside incredibly dedicated, passionate people," said Napolitano. "The decision was tough - and this moment, bittersweet - but the time is right."
A former U.S. secretary of homeland security and Democratic governor of Arizona, Napolitano became the first woman to lead the 10-campus University of California system in September 2013.
She plans to take some time off before taking a teaching position at UC Berkeley.
The Associated Press contributed to this report.