The 28-year-old joining the Citizens in the summer of 2019 from Columbus Crew and acted as backup to first-choice goalkeeper Ederson.
Steffen only made 21 first-team appearances under manager Pep Guardiola, including 16 outings in domestic cup competitions.
The USA international fell down the pecking order following the arrival of new number two Stefan Ortega in the summer of 2022, and as a result joined Championship club Middlesbrough on loan last season.
After making 44 appearances for Boro in the second tier, keeping 10 clean sheets, Steffen returned to Man City in the summer of 2023, but he was deemed surplus to requirements and has not be involved in any of the club's first-team fixtures so far this season, albeit nursing a knee injury for a lengthy period.
Steffen has now opted to end his four-and-a-half-year spell at the Etihad Stadium where he was part of two Premier League title-winning squads and also won the EFL Cup in 2021.
A fresh challenge back in his native America awaits for Steffen, who has penned a three-year contract with Colorado that runs until 2026.
Speaking to Colorado's official website about the arrival of Steffen, head coach Chris Armas said: "We are incredibly happy to bring Zack to the club. He is a top player with big experiences, and we know he will add so much to our group. His quality, leadership and winning mentality will help us for years to come."
Club president Padraig Smith added: "Zack is an elite-level goalkeeper with a wealth of experience internationally and in MLS. His exceptional skills, experience, and proven track record make him a valuable addition to our roster.
"His character and mentality will greatly benefit our team. We're thrilled to bolster our backline with his signing and look forward to welcoming him to Colorado."
During his time at Colombus Crew, Steffen established himself as one of the best shot-stopper in MLS and was named the league's Goalkeeper of the Year in 2018, as well as featuring in the MLS Best XI and All Stars XI in the same year.
Steffen could make his debut for Colorado when they travel to Austin for their first MLS match of the new 2024 season on February 7.