Evidently we got off the track somewhere here. Yes I store most of her files on external drives to keep her internal HD clean. But I'm not using USB 2.0; I'm using FW 800. Also, I have her do most of her editing/retouching with files on her internal HD and then move them to external. I think we got off track when I asked whether or not an SSD run externally would give me any boost given that the best I can do is FW 800. My main point of this post was to get advice on where to spend my money on the new iMac (CPU v. RAM v. HD) and to find out if the 5400 RPM drive on the iMac 21.5" would be problematic. Performance problems aside her screen is yellowing from the bottom up so she definitely needs a new machine. Though tips to help with performance in the meantime are appreciated.
I've read about people here using Firewire 800 enclosures with SSDs inside to run operating systems. The results are actually pretty good, of course you will not be getting SATA3 speeds, not even SATA2 but for small sequential files that OS actually uses it's fine.
With that out of the way, I think you should probably look for new computer. Your screen is going bad, your internal hard drive maybe too plus investing in reasonably sized SSD with Firewire 800 enclosure might be too much for this old machine. I'd retire 2009 iMac and look into getting either Mac mini quad or new iMac (you seem to be inclined towards iMac).
I'd wait a bit as there seem to be refreshes coming around. 2012 iMac is a nice machine but it is first generation of new design, they usually are not perfect so getting Haswell 2013 iMac will be better I think. New CPUs are not a big improvement but you will be getting faster wi-fi and probably new GPU options.
From my point of view the best deal is base 27" iMac. Now prepare that everyone will tell you to get the higher model with i7 CPU, 680MX GPU and 512GB SSD - I think that will bring pretty steep price tag.
Even for Photoshop work, quad core i5 CPU is still very good, hyperthreaded tasks are faster with i7 but unless you're running a business, you'll be giving Apple a fat stack of cash for few seconds shaved on processing.
512meg GPU is fine as well, Photoshop isn't that much optimized for GPU anyways, especially on Mac.
the only upgrade I would consider would be 1TB Fusion drive as that will speed up the computer tremendously while allowing to store large amounts of data. the good thing about 27" model is that you put your own (cheap) RAM inside, so in case you run out of memory it is easily expandable up to 32GB of RAM but I think you'll be fine with stock 8GB. if you ever feel it's not enough, putting one 8GB stick will bring up the machine to respectable 12gigs while costing usually around $20-$30.
also reusing your Firewire 800 drives is pretty straightforward once you buy Thunderbolt to Firewire 800 dongle. I hope my humble opinion is any help to you. some folks on this forum want to have always the high-end spec iMac but I think in this case its not really worth it - I have been doing professional graphic and video work on base 27" iMac with 8GB RAM and it worked like a charm.