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'85 CJ-7, 258/4.2L 6cyl. Bought new in 1985. Full cage, Warn 8274 winch, Ford 9" rear, front/rear Detroit Lockers w/4:88 R&P. T-5 tranny and 4:1 t'case. 33X12.50-15 BFG/AT, MSD ign, on board air---
You are only Limited on how much you want to spend.
But the first thing I would do is get rid of the Prestolite ignition and replace the dizzy with a Motorcraft. from there you can upgrade the ignition system to either an HEI or a TFI very easily.
Depending on your emission laws, you can de-smog it to the point you are running nothing but PCV, CCV, vacuum advance, and ICM.
If you do this, upgrading the carburetion is recommended. Actually, it is recommended even if you don't.
Everything I mentioned above are the "cheap" things relatively.
Once you've decided to drop more money, one of the best upgrades for the AMC 258 i6 / 4.2l is a 4.0L head swap....with or without the injection. You can keep it carbureted and gain significant power and performance. It also keeps it simple if you have de-smogged the engine.....otherwise you can use the 4.0L injection system and adapt your emission's system to accommodate it.
Adding a better cam, high compression pistons, p&p the head.....these upgrades compliment a head swap nicely.
One other word of advice. The AMC 258 i6 / 4.2l in it's stock form does not possess what I would call a very free-flowing head (thus the advantage of a 4.0 headswap). Therefore, adding an expensive exhaust system to a stock AMC 258 i6 / 4.2l is meaningless. The stock exhaust system is more than adequate for this engine.
The distributor mod is VERY worthwhile and cheap to do.. I'll bet I gained 15 horsepower easily. Find an old inline six Chevy Truck/Car that has the vacuum advance HEI distributor. You will have to peck the old drive gear off and replace with a Jeep type gear, but it will slide right in and requires only one hot wire from the ignition to work! I also noticed an increase in MPG with this mod, and much easier starts...