What is the longest bit that should be used? If I try to do 4/4 inch stock the collar ends up burning the wood because it makes contact.
“…longest that should be used?” The longest that is available and that your machine can fit. Keep in mind though, the longer the bit, you’ll have more bit deflection. I’d never carve with a 4" bit, unless it was thick and hefty. 
in general you want to use the shortest possible for your workpiece.
chucked bits are never perfectly straight, and never perfectly stiff either. the longer the bit, the more runout (wobble) at the tip, reducing accuracy. also the more it can flex as you’re pushing through material.
that said if it fits, and you are ok with the amount of accuracy reduced by the above factors anything you can fit in there will work