I'm thinking about encoding my music is NERO AAC VBR instead of LAME MP3 V2. My reasons are these:

1. I'm getting an iPod soon, all of my brothers have iPods, I just tested out an AAC file on my rockbox'd Iriver H120 (for sale btw) and it worked fine. Lots of players coming out look like they have AAC compatability.

2. AAC is a more advanced format, so compared to MP3 it has more room to grow. I want to achieve better compression ratios compared to V2, and it appears that AAC can achieve better results at lower bitrates (I'd encode around 160-175 vbr) than MP3 can

Any holes in my reasoning?

Yes. Your main intention for switching from MP3 to AAC is the fact that you're trying to achieve comparable quality at lower bitrates. But I don't actually share the opinion that the storage gain of an AAC bitrate range of 160-175 kbit/s is even worth being mentioned in comparison to the 190-200 kbit/s of LAME -V 2. Especially if you weren't the owner of a lossless archive to transcode from, i.e. if you had to rip your CDs once more, this whole thing would mainly be a waste of valuable time. A negligible difference in file sizes vs. a noticeable loss of compatibility in the world outside of iTunes and the iPod.

In addition to this you haven't stated why you're going for this bitrate yet. Your reasoning doesn't provide any clues about your choice. The multiformat tests of 2006 and 2007, which included AAC either as an anchor or a competitor, didn't provide any results leading to the conclusion that bitrates of more than 128 kbit/s were absolutely needed in AAC's case. Even the ~96 kbit/s anchors' qualities of the latest two tests obviously were very troublesome to distinguish from the originals for many listeners. Hence, did you conduct any personal ABX tests in order to decide about the final quality level?

I'm saying all this because I don't think you'd do yourself a favour with your plans. In its current state the outcome of the work would be close to zero.

In order to take advantage of future development you'll have to do this all over again in the future, as it certainly isn't going to improve anything you've already encoded.

As justification for taking any action now, this is not (nor will it ever be) sensible.

I have a lossless archive.

So there's no reason to go above 130kbs for NERO aac is what you're saying?

Exactly. Conduct some serious ABXing with bitrates in the, let's say, 80 - 130 kbit/s range to find the threshold that sounds transparent to your ears. Using samples of different genres and especially decent masterings (i.e. no victims of the loudness war) leads to reliable results. If none of these target bitrates were satisfying for you, then you'd best stay with the MP3s.

I'm saying that this isn't a legitimate reason to switch from mp3 to aac. When a new version comes out, you'll have to encode all over again.

some points i have to raise about your 2 reasons:
1. yes more and more aac compatible players are coming out but all of them will be mp3 compatible too. and not all mp3 players will support aac.
2. yes aac will sound better at lower bitrates. but do you really need the space? if yes, since you have a lossless archive, go for it. if not then why bother?

You should switch to Vorbis instead of AAC.

If it's for an iPod, I don't see anything wrong with AAC.

Personally, I try to stick with MP3 (when I'm not using a lossless format). It is the most popular, most universal, play-anywhere format, and it's always DRM-free. For example, virtually all players can play MP3, and the new Amazon download service is MP3 only.

But, AFAIK, that won't play on an iPod...

The next car you buy will likely play mp3 data CDs with its stock CD player.

It is true that AAC support is growing... but I don't think there are advantages over MP3. Both codecs at the range of 200kbps are pretty transparent, and both codecs show problems with killer samples. In AAC forum, there was a very audible test sample for classical music - killer AAC sample - that was ok for MP3. But the other way you may found killer MP3 samples that AAC can handle. So as far as lossy concerns, they're quite ok at the range of 180-200kbps, but they are not perfect.

The truly advantages I see for MP3 over AAC is that you're not restricted with a few hardware players, it's very wide-spread, right now, MP3 is generally the only ONE based solution for CAR/PC/HomeStereo.