would I be better off...

well, I will start off by saying that I am partial to Yamahas. I personally own a 1977 vintage CA-2010 integrated which is 30W/ch in pure class-A & 120W/ch in class-AB. Beautiful sounding amp & IMO lives up to its name "Natural Sound Amplifier CA-2010" which is printed on the face-plate. I has those vertical knobs just like your amp & volume control is on the extreme right, just like your integrated amp.
I was reading the specs of your integrated - it certainly reads like a very capable amp. 85W/ch at 8 ohms with a max power of 105W/ch & a dynamic power rating of 130W/ch into 8 ohms. I calculated that the 130W/ch dynamic power is a 3.7dB headroom, which is a respectable number for an amp that costs in the $500 range. There were a photo of the inside showing dual heatsinks & what looks like 2 bipolar output devices for push & 2 bipolars for pull per channel. I also noted that it has a "direct" signal path selection i.e. this direct path bypasses all tone controls - this is a feature that I like very much (I can do the same direct signal path in my CA-2010 by defeating all the tone controls as it does not have an explicit knob that says "direct").
IMO, you'd be hard-pressed to find another amp with all these features & the dynamic headroom of your Yamaha integrated.
If you don't like the Yamaha tone control sonics, play your music "direct".
your Yamaha is also iPod & iPhone ready so you could add your favorite iPod dock which has a built-in DAC like the Pure i20 iPod dock (I have this myself) & you'd be up & running in no time.
Yeah, you can also add your favorite external DAC & connect to one of many amp inputs & you'd be able to connect this DAC to the digital output of your iPod dock & you get very good SQ.
There are many good quality external DACs today - troll these Audiogon forums for numerous suggestions. I've not looked for a DAC in a long time hence i won't recommend any.

Sure you can buy a NAD or a Peachtree - make sure you like the sonics of their DAC long-term because you will be "stuck" with that internal DAC from NAD or Peachtree.
If you buy an external DAC, you can switch it out anytime if you don't like its sonics while keeping the rest of your system as-is. Your out-of-pocket expense would be the least - if you don't like the NAD or Peachtree you'll have to sell & your whole system will be down. If you have an external DAC & you don't like it, your iPod playback chain will be down & you can still play CDs & if you have a Bluetooth receiver connected into your Yamaha, you can still stream from your mobile devices. More flexibility with an external DAC, IMO.
Hope this helps. FWIW. IMO. YMMV.

Thank you so much for your input. I had no idea that the design of the Yamaha was that good for its low price. I thought maybe I need something that was 4ohm capable and had more power to get better sound quality. Sounds like I may have to spend twice as much to improve on the yamaha. If I did that, I could look at things like Anthem 225, creek evolution 50a, or exposure 2010s2, etc. I guess I should get an external dac first, and worry about upgrading the integrated later. The iPhone dock of the yamaha has no appeal to me. My music is on an external hard drive of my laptop, and my phone is android. Thanks again for your detailed response I am very appreciative.

The under-$400 DACs currently listed on this site that I'd buy are:
Benchmark dac1
Micromega MyDAC
Paramount z dac
But if you buy a dac, you gotta buy cables...
and If you have a lot of high-res music, not all dacs can play all formats.
Planning on using usb? Mac or Pc?
4 ohm capability depends on your speakers.

I agree with Bomb. I would keep your amp and get an outboard DAC.
Please tell us more about your setup: computer, file types, playback software, speakers.

I'm still learning about all of it, and I'm sure I need a new laptop as my server. I have a decent amount of flac files and my mp3 are mostly 320kb. (Is that cd quality?) But honestly, I stream a lot of spotify for the convenience. My music is stored on a WD passport ultra 2tb external portable hard drive,(and backed up on a 1.5tb toshiba) and my computer is an old laptop used only for my stereo system, but it is an old slow PC Sony Vaio with windows XP. (I got it for free). Dvd/cd players were bought used. Lexicon rt10 and Technics 5 disc that both see no real use.
the lexicon is picky about even slightly scratched discs. Maybe the laser is going bad.They speakers will be upgraded soon. They are used Acoustic Energy Aegis 3 towers. My headphones are Phillips phidellio x1 and my software to play the digital files is?? (Windows media player is not really used). I use mostly Winamp? and VLC media player I believe. Help me please!!! Teach me. The salesmen at these stores just sell stuff, they don't seem to know squat about what PC to use or software of file types, etc. How do I learn? Thanks.

Realremo. You didn't list the PS digilink III. Are you not happy with yours or is it just outdated? I thought one of those was for sale on here as well.

The digital link iii is a good DAC, but with a bad USB implementation. I'm assuming you'll use USB to get the signal to the dac, not a spinner. I use a usb converter with my DLIII.
I'd recommend JRiver for music playback on your laptop. If you're going with an outboard dac, and keeping the laptop on your rack to keep the usb and coax cables short, you can run JRiver with a remote app on an iOS or Android device. It would be best to upgrade to Windows 7, if you can, not totally necessary tho.

I found the DL III to be a fine DAC and very worth the used price i see then go for here on AG. Yes the USB was included for convenience. I used a USB/SPDIF converter as well. Problem is that it only has a single coax input so makes it difficult to use a transport and computer via coax. I sometimes just like to play a CD, so I went for a DAC that had more inputs. I do like to use an external USB converter as i believe there are many high quality DACs available where the USB input is the weak link. That said, given your budget the suggestions by Realremo are sensible. I will add that I put together a Music Fidelity V-DAC and V-Link combo buying used here and E-bay for ~$160. There is a V-link for sale now here for $75. It would work well for CD quality files and streaming from Spotify. Would also allow flexibility in purchase of a used DAC.

I am not a PC user, got into the MAcs. I rip my CDs as AIFF which is equivalent to WAV for PC. I do know that for PC, JRiver is highly recommended.

you guys are wonderful. Thank you so much!

When I did have a CD changer, I'd connect it to the Digital LInk III via optical cable. I had a nice affordable glass toslink cable that I used for this. But considering everything I did on the computer side; DBPowerAmp for ripping, JRiver for playback, JPlay plugin, decent USB/coax cables, and the USB converter, the SQ from the changer was so bad by comparison, I very rarely used it. Eventually it went to the garage sale. Now when I get a new CD, I cannot listen to it until I rip it, which sometimes is a drag, but it's a sacrifice I've chosen to make.
One more thing - you asked above if 320kbps was CD quality, it is not. No mp3 is ever CD quality, although Apple has engineered a process for their 256 aac files that sounds very good. The differences between lossy and lossless music tracks can be subtle, but they are definitely there, I've heard them.
Lossless formats (1411 kbps):
.m4a (apple lossess, compressed file but uncompressed on playback)
.wav (cannot tag with track names, artist info, etc)
.flac (has variable compression rates, but is still uncompressed on playback)
.aif (mostly Apple only)
.wma (windows media, typically encodes with DRM for copy protection)

Lossy formats (320 kbps max):
.mp3
.aac, .m4a (iTunes, any bit rate on a .m4a file above 320 is apple lossless, not AAC)
.ogg (popular for streaming radio on the internet)

Labguy,
I'm not hugely knowledable in this arena but you asked if MP3 320kps is cd quality and its not. Cd quality is 1411 kbps.

On a side note, spotify premium is 320 kbps, the free version of spotify is 160 kbps, and Tidal music streamer is 1411 kbps.

For me, there is quite a difference between 320 kbps and 1411 kbps. Much of the micro details, vocal nuances, and background / underlying vocals and harmonics are very subdued if not lost completely on 320 kbps. Once you've heard this, it's hard to go back, at least when critically listening.

There is a Micro Mega MyDAC for sale here, asking price is $250. I think it would be worth trying out. I have not heard one, however I mention this option because this DAC has gotten great reviews by audio press and owners as being very in the under $500 price class. If it did not work out as you liked it could be sold without much loss.

Thanks guys! I just bought the parasound zdac.

Great! Should be a good addition to your Yamaha.