You might also want to make sure the red wire is firmly attached to the 4th gear switch. I went through this with my 242 when it had the engine/tranny that are now in my 245. Frequently, it wouldn't work at all when stone cold, then sometimes would click on and off quickly if you did the shifter trick, until it was finally warm enough to work properly. When I took the engine out, I noticed that the 4th gear switch wire was barely making contact.
If you have a multimeter handy, put it on continuity or resistance (ohm) measurement mode. With the transmission in 4th gear, disconnect the harness at the center console and connect the (+) probe to the red wire, then the (-) probe to a good ground. If there's no resistance, then the wire and the switch are fine. Put the transmission in neutral or another gear. You should have infinite resistance. With respect to the relay wiring, the '85-'86 cars were wired differently, partly to make things more modular than they were before, and partly to allow usage of the OD OFF light as both that, plus, on B230F M46 cars, as the upshift light. That's why there's an extra wire (or two) coming off the blue relay plug on a later 240, compared to a 1981-84 car. Works with the small "b" shaped relay to provide the upshift light feature. Otherwise, if you went from 4th to overdrive and didn't disengage the clutch, the light would keep glowing, which apparently was a problem on late 1984 DL and GL cars with the upshift light. The extra wiring isn't really needed on a 1985 240 Turbo car, since those vehicles don't use the upshift light. On my old '85 245Ti, I actually switched to the 1981-84 relay. The orange and yellow wires get spliced together, since the 1259750 relay provides power to both the "5" light and the solenoid through one terminal. Main reason for doing so was due to our other M46 240s using the older relay - one was an '83 245Ti, the other was an '84 245GL that was built just before the upshift light was introduced, so it had the speed sensor in the diff, but no wiring. Didn't want to be stocking two different M46 overdrive relays. In retrospect, I could've replaced the blue relays with the red 1347768 relay used on the later cars, since it can be used with the earlier wiring. Just have to tape off the extra terminals that won't be used. Both of my current cars use the 1979-80 overdrive wiring setup without the relay. 245 was wired that way when I originally converted it from an Aw71 to a M46, and I wanted both cars to be identical.
As an aside, I have come across a few 1985 240T cars with Aw71 that came from the factory with the 1307793 orange relay, instead of the white one. Install the white relay, and it will cause the od off arrow to light up when the overdrive is in the default on position.