If you turn it up too much it will distort (clip). If you need more volume, try applying limiting to your files. You can increase the average volume of your tracks thereby getting more volume from the same amount of available gain from the iPod, all without clipping the the audio. Careful application of this can get your tracks to match up pretty well this way as well.
Is there an equivalent of MP3 gain for AAC encoding? I'd like to use the ipod eq sometimes (yeah, I know it sucks) without having the songs distort. How do you place a ceiling on how loud the peaks are?