Do you mean restore the iPod so it is like brand new, then upgrade the firmware to 4.1? Or do you mean upgrade the jailbroken firmware? I am pretty sure you can restore the ipod to factory settings then rejailbreak to a newer firmware, but if you upgrade the normal iOS firmware to 4.2.1, then the jailbreak has to be tethered for now. Hopefully greepois0n comes through for us soon.