The underlying problem seems to be the one described in
https://bugs.kde.org/show_bug.cgi?id=404990

The workaround mentioned in its 2nd comment, using PLAIN authentication
method, fixes the problem.

The problem has nothing to do with KDE Wallet unlike the very misleading
Kmail error -- that's why I'm not marking this bug as a duplicate.

** Bug watch added: KDE Bug Tracking System #404990
   https://bugs.kde.org/show_bug.cgi?id=404990

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https://bugs.launchpad.net/bugs/1840007

Title:
  Kmail reports "Could not read the password" when trying to set an IMAP
  account online

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