CD's store their data in an format called PCM. SPDIF wires have PCM flowing over them. Most DAC's directly interpret PCM digital data and convert that to sound. So you gotta get to PCM to get sound.
WAV and AIFF store a bit for bit, uncompressed copy of the CD's PCM file on your hard drive. WAV supports compressed audio, but is seldom used for this. ALC stores a bit for bit compressed copy that is not in PCM. A computer needs to convert the ALC compressed digital format to uncompressed PCM prior to feeding to a digital output or a DAC chip.
On playback on my apple mac system, AIFF definitely sounds better than Apple Lossless (ALC). Reasoning backward, I speculate this makes sense since the computer needs to dedicate resources to decompressing the ALC file which can in turn introduce timing artifacts (jitter).
For your iPod I would guess the audible difference is not significant. If you are concerned with iPod space I would use ALC, if not then AIFF. In iTunes you can actually just select an ALC, right click and have it generate the larger AIFF file.
