I am in a unique employment situation, so bear with me as I explain. Graduated in 2009 and joined a respectable mid-sized firm, but was not the practice area I was interested in (think mass tort/insurance/asbestos/personal injury). I tried applying to other firms, but there were hiring freezes and the economy was down. Last year I applied to more firms (civil litigation, employment law, appellate, etc) and received interviews; however, I was told that my experience at my firm wasn't the "experience" they were looking for because it was so specialized. I've even seen job posting for litigation positions with phrases like "Insurance defense attorneys need not apply." I was concerned that I was getting pigeon-holed into that practice, so I was doing everything that I could to get out of the firm. Luckily I landed a 2-year federal magistrate clerkship starting this year, but it is in a different city. I am hoping that this gig will "wash away the sins" of my last position, but I am not sure how effective it will be. After my clerkship ends in two years, I will be moving back to my old city. That being said, I have the following questions:

(1) Are firms impressed with/interested in applicants with federal magistrate clerkships?
(2) At the end of my clerkship, I will be five years out of law school. If I apply to larger law firms, do I apply as a judicial clerk or as a lateral?
(3) Should I consider clerking for a district court too or would firms be weary about hiring someone with little law firm experience but so many years outside of graduation?
(4) During the last year of my clerkship, when should I start looking for a firm job (assuming my clerkship ends in August)?

1) some firms may be especially in your local geographic area. Federal magistrate clerks deal alot with the discovery rules, so be sure that you emphasize your knowledge of discovery and case management when you apply to firms.
2) Judicial Clerk, although at many firms this distinction will be immaterial since magistrate clerks aren't usually paid a clerkship bonus and they will consider your previous employment as well.
3) I think clerking for a district court judge would be unwise. At the end of your clerkship you'll be five years out. Firms aren't going to want to pay somone who is a sixth year and half their experience is a clerkship.
4) Start applying in early february.

1) Depends on the type of law firm. Large law firms- not really. It's an employer's market and there are a lot of really competitive job applicants. I don't think a large law firm will hire you as a sixth year associate with only experience in insurance defense and a magistrate clerkship in a different market than the one you want to be in. For what it's worth, when the hiring partner at Kirkland was at my school, he was emphatic about clerking early in your career (as straight out of law school or within a year or two of working (assuming a 1 year clerkship)) because he had a difficult time justifying paying a 5th or 6th year associate salary to someone who had not begun to develop relationships with clients, like he expects a 5th or 6th year associate to have.

(2) Apply as a judicial clerk

(3) The only real benefit I can see to clerking at a district court is that it'll buy you another year or two (6-7 years out with no practical experience in the practice areas you're interested in is a lot) The economy could improve vastly around the time you apply for a job if you clerk another year or two.

OP here:
Thanks for the responses thus far.

I figured I wouldn't be hired on as a 5th or 6th year (which I am okay with). I was hoping to be considered as a 2nd or 3rd year, like other former judicial law clerks.

I'm concerned that I will be "unemployable" once my clerkship ends. It seems to me that the only firms that truly value judicial clerks are the big law firms. Very rarely do I see the clerkship experience of an associate on the websites of medium and smaller law firms. When I talk to attorneys at smaller firms they either (1) don't know what a clerkship is or (2) consider it worthless experience.

I guess that is my problem: I'm not "good enough" for the firms that actually hire judicial law clerks, but I don't have the legal experience necessary for firms that I would have qualified for after graduation.

Try to get an AUSA position. I know a couple of former MAG clerks who got in.