Though not an expert, I've faced a similar situation in the past. For some reason, the powers-that-be like to keep rollover money separate from personal funds. The explanation I was given was that this arrangement allows you to roll it back into a future employers 401K, should you ever desire to do so. In your case, I would probably create a rollover IRA for the 401K money, and start a Roth with new money. Alternatively, since it's less than $5K, taking the tax+10% hit may work for you - if you're young enough, you'll probably recoup the hit in the future with gains in the Roth. Hope this helps a little.
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