How to upload a sketch to an atmega328 via FTDI FT232RL UART and Arduino IDE?
Answering my own question; I just got lost in the troubleshooting.

Though I tested it both ways, I evidently overlapped issues, masking the core problem. Upload using programmer works great for transferring your sketch but it does NOT allow sketches to be uploaded via serial later. (Not sure if there is an inherent or logical reason for this, but this is what I have found by experimentation).
And like hcheung mentioned in the comments, a capacitor on the FTDI reset line is required. Connecting it directly will NOT work. I used a 0.1uF and it worked well. I have attached a couple different photos of my setup for someone following this path in the future. Note that the LED I am using has an internal resistor; a normal LED will need an 1k series resistor. Also, leaving the ISP programmer attached while uploading a sketch over serial did not seem to cause any issues.