Tier penalties.
So, as I understand it, if you have better gear than needed for levels, you get penalties to them (reduced damage and armor).
How exactly does that work?
How extreme is the penalty?
If I take a Calibur into the starting levels, how gimped will it be?
I'm still new, so I haven't gotten too far down yet.
Do you get to just jump straight to lower points later on?
http://wiki.spiralknights.com/Clockworks
One of the sections there is bonus reductions.
* Tier 1: equipment 2 star and higher will be reduced in effectiveness
* Tier 2: equipment 4 star and higher will be reduced in effectiveness
* Tier 3: equipment effectiveness is not reduced
That doesn't really tell me anything.

Your items are gimped to the max effectiveness of the item that corresponds to the Tier.
i.e. [Tier 2] Skolver will be scaled down to maxed out Dusker. Leviathan will be scaled down to maxed out Tempered Calibur. Etc.
Damage will be rescaled but bringing better gear is still a hugh advantage.
I, for example can 1 hit all monsters on T1 runs untill the terminal and 2/3 hit (not sure) after it till moorcraft manor.
Im using 5* and when i see guys in my party with 2* they're like "wtf ???"
to know it exactly go take a look on the wiki