We have decided to let it grow to $5k, then break it up and put some into another mutual fund. I know the amount is probably too small to make a difference, but would we have to pay capital gains tax on the money we took out, even though we put it into another investment? I think as long as we don't go out and blow the wad on hats, we're fine. She thinks as soon as it's out we pay taxes on it.

Your wife is correct. If you sell it, you have to pay income tax on any gain. Whether or not you reinvest the money has nothing to do with the taxable issue. You might want to read the FAQ since you will probably have both long term and short term capital gains since you are investing monthly and if your dividends are reinvested.