Why can't I save my password protected file in a password protected folder?

I've just encrypted my folder which contains password protected files. I've attempted to save a new password protected file (Word document) but have had to save it to my desktop because when I try to save the file to the folder I receive a message: "Word cannot save or create this file. The disk may be full [which it is not] or write-protected [which it is]". Sooooooo. Does this mean I can only password protect the folder and not the files? Which is really annoying because I really do need the two levels of security. Please can someone help?

File Vault is not in Disk Utility.  It is in System Preferences/Security/FileVault.

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