Tell us about yourself!
The plastic bag is good if the items you're picking up are light, but if the magnet is strong and the object has a strong pull, you won't be able to release it without ripping the bag.In that case put it in a plastic bottle like a soda bottle for easy release.
The level sensor is easily done just with wires for electronic sensing with the Arduino, the analog inputs are high impedance, so just use a 1M pullup resistor so it sits at 5V normally, and when the level of the water rises enough to touch the sensor wire, it'll bring it to ground, which gives you the high water trigger indication. I used galvanized wire inside straws to isolate them from contact with the walls of the pit, and the on/off levels can be maintained more precisely than with mechanical floats or timers.
What kind of resolution is there for the control? Is the limitation from the sensor or from the servo output?
Should note the need to use lead free solder for potable water pipes used for drinking, as opposed to pipes for toilets, as lead can leach out into the drinking water.