DAC OR NO DAC???

@rwrightcpa

Or if you want a single unit solution that performs really well for both stereo music playbacks as well as surround movies (HT) I would highly recommend the Classe Sigma SSP mk2 preamp processor ($6k) or the original version of the Sigma SSP ($5k original msrp) that can be had at discounts (maybe around $3k or less) since it’s been replaced by the mk2 version. The mk2 version has upgraded HDMI and audio video boards to accommodate supports for Dolby Atmos, DTS-X, 4k video pass through.

You can sell your Marantz AV7704 av preamp processor. The Classe Sigma SSP is optimized for use as a high end stereo preamp for music playbacks. In the end you won’t even need to add an external DAC with this Classe Sigma SSP. For digital stereo music file playbacks you can run USB cable to its rear USB DAC input and its USB input sounded the best compared to its other inputs.
This unit is optimized for use with its USB input for digital stereo music playbacks. Its USB input implementation and configuration is very well designed and engineered.
For your AV or video sources you can still connect using HDMI cables to its HDMI inputs.

It is a bargain especially considering the price point and all the capabilities and functionalities that this unit performs. It is an AV preamp surround processor/excellent stereo preamp performance/excellent sounding when used its USB input for $5k new or less than $3k used.

And you can still use your McIntosh MC207 multi-channel amp to power all your speakers.

Op’s original budget for DAC was $500. I completely agree the Marantz 7704 preamp/processor preamp section will be the limitation of the system. Most likely the AV7704 volume control is done by an integrated circuit. But with $500 budget, I don’t see how that can be addressed.

I suggest save until you have bigger budget, then consider adding a dedicated stereo preamp with HT bypass followed by adding an external DAC.

My own journey of combining 2-channel with HT was a painful one (money wasted).  Eventually I settled with semi-DIY passive preamp (fully balanced silver autoformers for 2-channel with another 3-channel copper autoformers for HT channels, working as slaves and will follow stereo volume).  I use Oppo 205 analog outputs for HT, started with Oppo 95 initially, XLR used for main channels.  HT signal processing and channel balance all done in Oppo.  Whether in HT or 2-channel, it's always pure 2-channel audio quality.

I have a Jitterbug and it works great. Of course, I didn't have any interference problem without it but the sound got better with it. You can also check iFi's filters. Or go all-out and get a re-clocker and then a not-to-expsensive dac. I have also tried a chep iFi nano and many people like the iFi Nano Black Label. Or you could go a bit higher in level and try the iFi Micro Black Label or the Chord Mojo. 

Youtube uses a pretty advanced codec which should be able to get good results if you have good gear. Probably not as good as red book but worth listening to if you're note very fuzzy.

HDMI routinely gets dissed on Audiophile Forums, but I listen to an Oppo 203 via HDMI to a Bryston DAC 3, which has 4 HDMI inputs.  The HDMI is excellent, fully the equal, if not superior, to every other input on the Bryston