I currently have 40% of my income taken out for my 401K plan. A friend told me that I can be taxed and penalized when there is too much taken out for 401K. When I reach the maximum, there is no longer any taken out; however, she asked her financial planner and also her tax guy and they both agreed that you can only contribute a certain percentage of your salary. I am very confused about this and have found nothing regarding a percentage anywhere on the internet. My company does not match anything.

I've never heard of that much being taken out. Typically the maximum an employee can contribute per pay period is 15%. This is to eliminate that maximum being blown out of the water. There is a maximum that can be contributed annually into an employer 401K. I'll try to find the information for you. I used to work in finance and we had to cease 401K payments all the time since 15% of big huge fat paychecks reaches the maximum really quick.

For 2007 the annual maximum contribution is $15,500 unless you are over 50 and doing "catch up" then you can max out at 20,500

I knew the maximum was somewhere around that (I'm over 50, so I'm allowed the $20,500). As far as I know, you can contribute up to 100%, but of course, once you reach the maximum ($20,500 in my case), it automatically stops. The percentage I'm talking about (of which I know nothing) has something to do with your salary. According to my friend's financial advisor and her tax guy, you cannot go over a certain percentage of your salary. She was trying to explain it to me, but I didn't understand. I guess if you make $20,500 a year, you certainly cannot contribute 20,500. I guess that's where the percentage comes into effect.

That I don't have any knowledge of. We have a lot of smart cookies around here. I'm sure one of them will make their way to your post :)

I don't believe that the law specifies a maximum percent of salary that one can contribute to an IRA, although as already noted there is indeed a maximum dollar amount. However, companies often impose rules in their 401(k) plans that are not necessarily required by law - and it is not uncommon for employers to impose a maximum contribution of 15% of eligible salary. Sounds like your company has no such restriction.