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Sounds to me like it's their way of covering their tail with respect to rolling the funds over to another 401k plan in the future. By forcing you to move the funds into another IRA, they are making very clear that the money is not eligible for a future rollover into a 401k.

Are there other ways to handle this issue? Probably. Does this one work for Scottrade? Sounds like it. As long as you're aware of the consequences of "tainting" the rollover funds, just jump through their hoops to get where you want to go. If you give up on this broker, you'll just have to fill out the same paperwork at another one.

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