I think there are a number of options available all with various pros and cons.
The 2 major factors for me are sound quality and ease of use.
On the sound quality side the audio will be coming either directly from the Raspberry Pi or from the Remote (iPod Touch).
Sound from the Pi is a bit of a mixed bag right now. Some users are having good luck with some added DAC hardware others are not. The 3.5mm audio jack on the Pi right now seems to be giving everyone some cracking noise, so that option is out until there is a fix.
Output from the iPod for me is decent. I’m not an audiophile, but for music on the road it is good enough.
Remote Option 1: XMBC. The Pi will run XBMC and the iPod will use an XBMC remote client. This option I believe will have the audio coming from the Pi, so additional hardware will be needed. There are some remote options that are free, so there will be room to experiment.
Remote Option 2: Music Player Daemon. This will also have the server running on the Pi and the iPod will be the remote. I think this might also work well for a minimal hardware option through the GPIO connectors. Audio output will also be from the Pi.
Remote Option 3: iTunes. Running the DAAP server on the Pi and allowing the iPod to connect and control the music through iTunes. The audio would then be coming from the iPod in this option. I think I could also use Option 2 at the same time, since the client could be from a different iPod/iPad/Computer. The one major plus for me using this option would be the ability to use the Genius function in iTunes. Selecting a song and letting the software make a playlist on the go is probably going to push me to use this option.