Another option would be the Spitfire II DAC - for the money, this has to be shortlisted for the Awards next year. It's a superb performer for the cash - got mine on offer for £150, but the TSP is £250. I have to say I'm bowled over by this unit. Tiny little thing, three inputs (USB, coax and optical) with the option of an additional offboard power supply from Firestone Audio (via the excellent Audio Elevation in Doncaster or one of the other UK suppliers who stock the range) for just a whisker of £100.
I found the DacMagic great for connectivity, but out of its depth in making the music sound anything more than a facsimile of how it should. All the bits were there (upsampled even!), but there was no lifelike dynamic in there. The Spitfire II has that missing ingredient. What it lacks in inputs, it delivers in their place a confident, assured and highly musical sound. Bass depth is astonishingly good. The treble will be a problem if you already have bright speakers and amplification, but if all that is in order, you'll have an absolute winner on your hands. I can't recommend it highly enough and wish WHF would clap hands on one to review!
(EDIT: Thought I'd post this as a possible "third way" in addition to the other two you have - the Rega DAC and the modded DM might well be a significant step-up, but this might be worth some thought if you're looking at improvements for reasonable money).