I ended up getting it to work using..
PHP Code:
/* making the new image transparent */
$background = imagecolorallocate($thumb, 0, 0, 0);
ImageColorTransparent($thumb, $background); // make the new temp image all transparent
imagealphablending($thumb, false); // turn off the alpha blending to keep the alpha channel
// create the resized copy
imagecopyresampled($thumb, $source, 0, 0, 0, 0, $thumb_width, $thumb_height, $width, $height);
But the colors seem a tad lighter in the new thumbnail? Is that just due to the resizing and keeping transparency?