The short story "Gimpel the Fool" by Isaac Bashevis Singer tells of a simple baker who is ridiculed for being naive and gullible. The quotation in question is from the final paragraph of the story. An appreciation of the plot is important in order to understand what this quote means means.
Because Gimpel is so easy to deceive, his classmates tease him. Later, all the townspeople tease him. They tell him wild stories, and he gives them the benefit of the doubt by trusting them. He explains that his motivation comes from the Wisdom of the Fathers, where it is written that anything is possible. The town rabbi supports him by saying that Gimpel is not a fool; rather the people who tease him are fools.
Gimpel is eventually pushed into marriage to a woman of questionable morals, named Elka. She won't allow Gimpel to sleep with her, and yet she begins to have children, one after the other, until there are six of them. Despite his doubts, she insists they are his. However, she becomes sick, and on her deathbed, she confesses that the children are not Gimpel's.
Later, Gimpel is visited in his dreams by the Spirit of Evil. The Devil tells Gimpel to bake his urine into the bread of the village, and in this way, he can deceive those who deceived him. He does this, but in another dream, Elka, his dead wife, visits him and affirms that in the afterlife there are consequences for bad deeds. Gimpel then destroys the tainted bread.
After this, Gimpel gives all his money to his children, leaves home, and becomes a wandering mendicant. He grows old, and sometimes in his dreams he sees Elka. He pleads with her to let him join her, and she tells him to be patient. It seems that she has at last become simple and sincere.
Now we come to the last paragraph and to the quote: "No doubt the world is entirely an imaginary world, but it is only once removed from the true world." This comes directly after the paragraph in which he implores his wife, "Let me be with you." After this quote, Gimpel explains that he is dying and that the plank the gravediggers use to carry away corpses is ready at the door. He is joyful because in the afterlife, he can no longer be deceived.
I would sum up the meaning of this quote as follows: To Gimpel as he is dying, the physical world is the imaginary world, rife with deception. The true world is the world of the spirit—where he is going, where there is no place for deception.