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But, I will call the brokerage firm and stop contributing to the same funds at least.

That should be more of an investment decision than a tax decision. However, with your need for the money approaching, it is reasonable to consider allocating new money to a different investment.

You might also consider what to do with the dividends from the funds - reinvesting vs. getting them in cash or investing them in a different fund. Reinvesting the dividends leaves you with the same recordkeeping problems that you already have.

I do have another question. This might be investment question than tax. I just received 1099 from both of these accounts. Last year, both showed around $3000-$4000 distribution. This year, that amount has gone up to more than $10,000 each. I think I am in for a large unpaid tax this year, even if I file individual returns for each of them.

Yep. That's a good-sized distribution. And that means a good-sized tax bill.

So, am I better off selling the fund and move to index fund or stocks to minimize the annual distribution and its tax?

Well, I thought the whole point of investing was to get some nice, big distributions. ;-) However, there is an issue of being tax-efficient with the investing. Depending on your personal tax situation, you might want to consider looking at funds that are more tax-efficient. Index funds are often more efficient than actively managed funds.

When I eventually sell the fund and recalculate the cost base, should I deduct the tax that I have already paid over the years, from the gain? Otherwise, I would be double taxed, right?

No. There is no double-tax issue here.

The easiest way to consider all of this is just as if you received the dividends in cash and immediately purchased more shares of the mutual fund. (Because that is actually what you did - you just skipped the administrative issues with sending you a check and then sending it back to purchase the additional shares.) The taxes paid don't enter into this picture. To the extent there were any taxes on the dividends each year, those were paid with some other money.

--Peter
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