Although I also like Segovia, Cuenca and Alcala de Henares as potential day-trips from Madrid, Toledo would definitely be my #1. I'd just take the train. The station is well below the town so you'll probably want some form of transportation up. It's walkable because there are escalators to do most of the climbing, but it would be a long walk, and on a day-trip I'd want to save the time. I'm sure Rick's guidebook details the transit options from the train station into town. I believe they are taxi, city bus, and a vehicle that does a sightseeing loop--probably one of those pseudo-train things. The latter would be a good idea if you want to get out to the overlook that provides the classic view of Toledo.
Rick warns of possible sell-outs on the Toledo trains, especially for the return trip to Madrid, and I have occasionally observed trains marked as sold out on the Renfe website when I've used it to answer questions on this forum. The fare will not go up if you buy your ticket at the last minute, and it's nice to be flexible about day-trips when you can (for reasons of weather if not otherwise), but I'd at the very least keep an eye on Renfe.com to be sure trains aren't selling out. You'll save a bit of money by buying a round-trip ticket if you're willing to commit to a firm return time.
Be aware that ticket lines at Atocha Station are perhaps the most unpleasant thing about traveling to Spain. I think the Toledo tickets aren't sold at the nightmarish long-distance counters, however, which is a monumental blessing. The ticket machines have English instructions and are easy to use as long as they don't choke on your Canadian credit card.
If something goes badly wrong with plans for the train, you can also get to Toledo by bus, but it takes a good bit longer, and the buses depart from a station that will probably required a subway ride (or taxi) to reach. Then again, if you stay in the center of Madrid, you won't necessarily be within walking distance of Atocha Station, either.
