diff --git a/src/llama_stack/cli/stack/run.py b/src/llama_stack/cli/stack/run.py
index 044ce49c9..c9334b9e9 100644
--- a/src/llama_stack/cli/stack/run.py
+++ b/src/llama_stack/cli/stack/run.py
@@ -106,7 +106,8 @@ class StackRun(Subcommand):
 
             try:
                 config = parse_and_maybe_upgrade_config(config_dict)
-                if not os.path.exists(str(config.external_providers_dir)):
+                # Create external_providers_dir if it's specified and doesn't exist
+                if config.external_providers_dir and not os.path.exists(str(config.external_providers_dir)):
                     os.makedirs(str(config.external_providers_dir), exist_ok=True)
             except AttributeError as e:
                 self.parser.error(f"failed to parse config file '{config_file}':\n {e}")
diff --git a/src/llama_stack/core/configure.py b/src/llama_stack/core/configure.py
index 734839ea9..5d4a54184 100644
--- a/src/llama_stack/core/configure.py
+++ b/src/llama_stack/core/configure.py
@@ -17,7 +17,6 @@ from llama_stack.core.distribution import (
     get_provider_registry,
 )
 from llama_stack.core.stack import cast_image_name_to_string, replace_env_vars
-from llama_stack.core.utils.config_dirs import EXTERNAL_PROVIDERS_DIR
 from llama_stack.core.utils.dynamic import instantiate_class_type
 from llama_stack.core.utils.prompt_for_config import prompt_for_config
 from llama_stack.log import get_logger
@@ -194,19 +193,11 @@ def upgrade_from_routing_table(
 
 
 def parse_and_maybe_upgrade_config(config_dict: dict[str, Any]) -> StackRunConfig:
-    version = config_dict.get("version", None)
-    if version == LLAMA_STACK_RUN_CONFIG_VERSION:
-        processed_config_dict = replace_env_vars(config_dict)
-        return StackRunConfig(**cast_image_name_to_string(processed_config_dict))
-
     if "routing_table" in config_dict:
         logger.info("Upgrading config...")
         config_dict = upgrade_from_routing_table(config_dict)
 
     config_dict["version"] = LLAMA_STACK_RUN_CONFIG_VERSION
 
-    if not config_dict.get("external_providers_dir", None):
-        config_dict["external_providers_dir"] = EXTERNAL_PROVIDERS_DIR
-
     processed_config_dict = replace_env_vars(config_dict)
     return StackRunConfig(**cast_image_name_to_string(processed_config_dict))
diff --git a/tests/unit/cli/test_stack_config.py b/tests/unit/cli/test_stack_config.py
index 0977a1e43..5d54c2257 100644
--- a/tests/unit/cli/test_stack_config.py
+++ b/tests/unit/cli/test_stack_config.py
@@ -206,3 +206,26 @@ def test_parse_and_maybe_upgrade_config_invalid(invalid_config):
 def test_parse_and_maybe_upgrade_config_image_name_int(config_with_image_name_int):
     result = parse_and_maybe_upgrade_config(config_with_image_name_int)
     assert isinstance(result.image_name, str)
+
+
+def test_parse_and_maybe_upgrade_config_sets_external_providers_dir(up_to_date_config):
+    """Test that external_providers_dir is None when not specified (deprecated field)."""
+    # Ensure the config doesn't have external_providers_dir set
+    assert "external_providers_dir" not in up_to_date_config
+
+    result = parse_and_maybe_upgrade_config(up_to_date_config)
+
+    # Verify external_providers_dir is None (not set to default)
+    # This aligns with the deprecation of external_providers_dir
+    assert result.external_providers_dir is None
+
+
+def test_parse_and_maybe_upgrade_config_preserves_custom_external_providers_dir(up_to_date_config):
+    """Test that custom external_providers_dir values are preserved."""
+    custom_dir = "/custom/providers/dir"
+    up_to_date_config["external_providers_dir"] = custom_dir
+
+    result = parse_and_maybe_upgrade_config(up_to_date_config)
+
+    # Verify the custom value was preserved
+    assert str(result.external_providers_dir) == custom_dir