I did a little more testing today and have found that if I convert my music at 256 kbps and use the output connection on the bottom of the ipod I get very impressive quality. I have played the same track from a CD and AUX in and I cannot tell the difference. The levels are closely matched too, so I dont have to adjust levels when going from AUX to CD to SAT...they are all evenly balanced.
If I compress the music lower than 256 kbps I can start to hear the difference in my stereo. (NOTE: I have the Premium Sound Package.)

Below is an image of the cable I am using....well worth the $30 as it sounds significantly better than the headphone out.

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2013 X5 35i M Sport