if you leave the money in your traditional IRA, you could have earnings, and if you have earnings, you have to pay taxes on those earnings when you do your conversion. If you accumulate enough earnings and then convert your entire account balance, you’ll have an excess contribution you will have to correct by paying taxes. Any untaxed amounts in the traditional IRA will result in taxation after the conversion.

Here’s the catch, though: If you have pre-tax money sitting in any other traditional IRA accounts, your backdoor Roth conversion will trigger a tax bill, courtesy of the IRS’ pro-rata rule.  (this rule applies even if you contribute to an IRA and then immediately do a backdoor conversion) 

The Pro-Rata Rule and Backdoor Roth Conversions
For tax purposes, the IRS considers all your (seemingly separate) IRAs as one big account. The pro-rata rule boils down to the percentage of your total combined IRA balances that has yet to be taxed. Whatever that percentage is determines the percentage of your backdoor Roth IRA conversion that will be taxed.

For example, let’s say you have $94,000 in existing traditional IRAs that were funded with pre-tax dollars. And now you contribute $6,000 to a new traditional IRA with after-tax dollars, then immediately convert that $6,000 to a Roth via the backdoor Roth IRA strategy.

As far as the IRS is concerned, you now have $100,000 in traditional IRAs, and the $6,000 you are contributing with after-tax dollars represents 6% of your total. That means only $360 of your $6,000 backdoor conversion is tax-free (6% of $6,000). You owe income tax on the other $5,640 you backdoored.

I don't understand the concern.

First, she contributed money to a tradition pre-tax IRA.

Next, instead of leaving the money as cash, she bought some investments, still in the IRA.

Is that it?

That's no problem at all.  Just sell the investments and do a rollover to the Roth IRA.  What you do with money inside an IRA is largely irrelevant.  The backdoor Roth conversion can still happen whether the IRA balance is in a cash account or investments, it's just that the IRA trustee will have to sell the investments when you perform the rollover.  

Now understand, for a "back door Roth conversion" to work, a person has to rollover/convert their entire balance in traditional IRAs.  If your wife has two IRA accounts each with funds, she has to rollover both accounts, and if part of the balance is a pre-tax (deductible) contribution, there will be some tax on the conversion.  But moving money from a cash account to an investment within the IRA does not create a separate IRA.

Nothing about the earnings in the traditional IRA causes an excess contribution.  Perhaps that was just poor wording by Mike9241.

Presumably there was nothing in your wife's traditional IRA(s) prior to the traditional IRA contribution in question.  There is nothing technically wrong with investing in the traditional IRA prior to doing the Roth conversion.  The only effect is that there could be an investment gain or loss prior to the conversion.  If there is a gain, a Roth conversion will be partially taxable.  If there is a loss, the Roth conversion of the entire account will be nontaxable but there will be some amount of unrecoverable traditional IRA basis.  Under these circumstances it's usually suggested that the IRA owner convert slightly less then the entire account; the slight remaining amount will preserve the basis and allow it to carry forward.

(As Mke9241 said, if your wife has other money in traditional IRAs, a Roth conversion will be partially or mostly taxable, with only a portion of the basis in nondeductible traditional IRA contributions applied to the conversion and the remainder staying in your wife's traditional IRA(s) to be applied to future distributions until there is no more money in her traditional IRAs at year end.)

Thanks, TurboTax didn't send me notifications that people had replied.

My wife invested a small amount, maybe couple hundred. She bought VTSAX, so she's probably down a few points. She's still has a couple thousand left to transfer to her Roth, so no risk of exceeding limits.

She called Fidelity and they told her she could even transfer the shares without even selling. I'm always hesitant to follow the brokers advice, they gave me incorrect information a few years ago, didn't have any consequences, but I'll be forever biased. 

Thanks for your response, I didn't get notified.

She only has a traditional IRA and the Roth IRA. We only use our traditional IRA to roll over the cash to our Roths, we don't have any other IRA. Just our 401ks.

I'll tell her she's good to go. She'll probably sell at a loss, but then buy the same VTSAX almost immediately in her Roth IRA. 

there's no reason to cash out.

as broker told you, you can convert "in-kind" so what you specify - existing holding - will move to the Roth IRA.

make sure you made the initial contribution non-deductible on Form 8606.

@User2698470 

@User2698470 

As confirmed by others, it is possible for the broker to transfer the investment from a traditional to a Roth IRA without actually selling the specific shares.  In some cases, this is actually preferred, rather than selling and re-buying the same shares.