HOW DO I UPDATE TO IOS7?

A device running iOS 6.1.6 is incapable of running iOS 7 or above.

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What generation iPod Touch is it : Identifying iPod models - Apple Support ?

If it's the fourth gen then iOS 6.1.6 is the highest version that it supports

If it's the fifth gen then you can update to the current iOS version (i.e. 8.2, you can only update a device to the highest iOS version that it supports) via Settings > General > Software Update (after taking a back up and copy any purchases over to your computer's iTunes library via File > Devices > Transfer Purchases)

A fifth generation iPod touch will never be running 6.1.6; these devices jumped from 6.1.3 to 7.0.

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I forgot that 6.1.6 was only for iPod Touch 4th and iPhone 3GS