Ok, first things first. As far as i know, jailbreaking iPhones/iPods is legal, so there should be no issues posting here. But if i am wrong, i don't mind if this post is closed.

Now, as the title suggests, i am planning on jailbreaking my iPod Touch. It is 4th generation and iOS version 4.2.1, although when i got it a few months ago i think it was 4.1 (the 4.2.1 upgrade was available as soon as i connected it to iTunes, so i upgraded it).

I have read up on the jailbreaking process at websites like http://helpmejailbreak.com and wikipedia, and have downloaded some of the software required (ZiPhone and redsn0w_win_0.9.6b6).
But before i attempt to jailbreak, there are still a few critical things i need to know:

1. Apparently the patch for 4.2.1 is tethered. Since i don't want this, i may have to downgrade to 4.1 in order to jailbreak. I may be able to restore to 4.1 since i think that's what my iPod came with, but i'm not sure. Is this possible to do so, or is there an untethered jailbreak for 4.2.1?
   
2. Will i lose any app data, either if i restore to 4.1 or when i jailbreak? I don't want to lose saved progress in any of my games.
   
3. The main reason for doing this is so that i can access the contents (i.e. music) of my iPod because it will appear as a drive in Windows. Is this true, and will i be able to access the whole drive (i.e. app data, executables, etc), or at least just the music folder?
   
4. After i do it, will i have any problems later? For example, what would happen when new iOS updates are released - will i have to wait for a new patch for each new update? Or could the patch crash and lose data?

I've Jailbroken a few iPods/iPhones so far, so I can may answer some of your questions.

1. If you are lucky there is a jailbreak available for 4.2.1. All what you have to do is to google it.

2. If you use RedSn0w to jailbreak it you will have to completely restore your iPod with the Jailbroken firmware. AFAIK there was a tool called blackra1n which could to the jailbreak without loosing any of the data, but it was only available for version 3.x. Also there is a website called Jailbreakme.com for version 4.0 which you could open directly from your device. But those won't work with newer firmwares, so you have to restore it.
Maybe you can save your data somehow.

3.Don't know.

4. The only problem you will have is indeed if Apple releases an update. You can either leave your jailbroken older firmware on your device, or wait for the new one to be able to jailbreak and then restore your device again with it.

Hope that helps!

Yes, thank you. At the time of posting, http://helpmejailbreak.com mentioned that greenpois0n was available as an untethered jailbreak for 4.2.1 but their website was unavailable. It is up and running today, so i will check it out.