I would keep her with the kids and have her do 1st. You can always afterschool a little to catch her up if necessary. The disparity entering 1st of reading skills is so huge, at least where I live. You have some kids who know their letters, others reading Hop on Pop and others reading Henry and Mudge. You might find one or two (my Ds's class had 3) that are reading chapter books.
What kind of reading system is her school using? Are you sure you have an accurate measure of her reading? We've been prone to a bit of denial around here! Maybe look at an at home reading assessment like Let's Go Learn and see if you feel like it gives you more of a picture.
