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Welcome. A collet extension as suggested will work.

However, from what you are describing, it is time to install a router mounting plate, which means cutting an opening in the table to fit a plate from any manufacturer that makes one for your router. These plates sit in an exact fit opening, on top of a lip that's half an inch smaller than the plate opening on all four sides. You remove the plastic plate on the base of your router and attach the bare base directly onto the plate. Most plates are between 1/4 and 3/8ths thick, so your bit will be higher. Kreg and many other suppliers make mounting plates. Kreg also makes a set of four leveling screw setups so you can level the top of the plate with the top of the table.

You are correct, most of the shank must be inside the collet to use a bit safely. They should bottom, then lift about 1/8 inch. Or for half inch collets, you can get a half inch grommet and place it in the collet, then just drop the bit in and it will bottom out on the grommet.

Hope the pictures and drawing are helpful. This is pretty easy to do. Cut the small opening first, then use a router with a hinge mortising bit with a top mounted bearing to cut the larger opening. Lay the new plate on the table, surround it with boards so it makes a template to guide the bearing. Easier to do than describe. Don't try to take off too much at once. Pix 1 a Kreg plate with quick twist lock inserts. Pix 2 Kreg leveling devices. Drawing is a side view of the lip for the plate.

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