I built a PC and loaded the OS with a Windows 10 USB drive. If I do a system restore will Windows still be on it or do I have to reinstall the OS?
If you've just loaded Windows on a new build, why would you do a system restore? You should create a restore point in the event you have a major software or driver issue that causes issues so you can revert to a previous point in time.
Do I create a restore point on a USB flash drive or on an external HDD?
If it gives you the option when creating a restore point, place it on whichever your primary drive is (not a usb). It's been a while since I've created one so I can't remember if it asks for one or not.