Ultimate Icon Converter is a freeware from door2windows which lets you easily create new icons (.ico) from images or extract images (.png, .bmp, .tif or .jpg) from existing icons.
It is compatible with all versions of Windows. You may need to install .NET Framework 4 to use it on Windows 7 and earlier.
Ultimate Icon Converter is an app like Photoshop, it does not modify Windows, it takes in files and creates new files.
I'm unsure about it, but it looks like you need to create an source image file for every dimension? I'm used to png-to-ico, which works fine for me. It's a simple dos-exe which creates icos from a png source folder to different dimension .icos with alpha. It is a part of the GANT packages which can be downloaded here at dA.
No, that's completely optional. You can choose to include different images for different dimensions but there's also an Auto option which will automatically choose a larger image file and resize it.