Innertuber makes some great points here. Lossless is definitely the minimum you'll want to encode in if you're looking for the absolute best quality as at that point you lose NONE of the audio when pulling it off the CD whereas MP3 or AAC is a lossy encode. A lossy encode uses an algorithm to cut out portions of the audio that your ear "can't" hear, but the more you compress the more it cuts out, and even though its designed not to sound different, most people can tell a difference, esp as you compress it heavily. On my mp3 player and using some fairly cheapo earbuds I can tell a difference between lower quality mp3 rips(128, 160, and 192kbps) and a 256kbps rip. 256kbps is pretty good compromise for me and is what I use on my mp3 player as mine is only 20gigs and I like to carry all my music around. But for playing music in my living room I've ripped all my music lossless as I can tell a difference between it and any type of mp3. So essentially i've got 2 copies of my collection on the same pc, but that's not a big deal for me and hard drive space is so cheap these days.
I'd also like to point out that your ipod isn't the best source for playing music on real speakers. The DAC's and processing hardware in the ipod isn't going to be nearly as high of quality as most higher quality PC soundcards or a universal disc player. I'd say its average at best, but if you can't tell a difference, then it would work great for you. It's decent enough for any type of normal headphones or earbuds though.
So, like InnerTuber said, play around with it and see what you like. I'd go with one of your favorite CD's and rip it a couple of different ways, AIFF, lossless, maybe a 256kbps mp3, and a smaller one like 192 or 160. If you can't tell a diff between any of them on the ipod, then you might as well rip it all in 192 as it saves the most space. To me, mp3 players are all about compromises, so you have to decide on where yours should utimately be.
Hope that helps!